104
Focus Media Holding Limited Focus Media Holding Limited 2006 ANNUAL REPORT
Focus M
edia H
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Focus Media Holding Limited
212MM210MM 194MM
Focus Media Holding Limited
2006 AN
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AL R
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Contents
Financial Highlights 2Letter to Shareholders 4Management’s Discussion and Analysis 8Report of Independent Registered Public Accounting Firm 44Consolidated Balance Sheets 46Consolidated Statements of Operations 48Consolidated Statements of Shareholders’ Equity (Deficiency) and Comprehensive Income 50Consolidated Statements of Cash Flows 52Notes to the Consolidated Financial Statements 55Additional Information — Financial Statement Schedule 1 98Corporate Information
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Financial Highlights
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Revenues
Income from operating
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Financial Highlights
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The following table summarizes selected consolidated financial data, which should be read in conjunction with
our Consolidated Financial Statements and Notes thereto and with Management’s Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere herein.
(In thousands, except per share data)
Year Ended December 31 2006 2005 2004 2003
Statement of Operations Data:
Net revenue $ 211,905 $ 68,229 $ 29,210 $ 3,758Income from operations 80,378 22,786 12,953 525Net income 83,197 23,548 373 25Income (loss) per share — diluted $ 0.16 $ 0.06 $ (0.07) $ 0.00
Cash Provided by (Used in):
Operating activities $ 93,355 $ 11,269 $ 4,045 $ 1,320Investing activities (121,994) (117,667) (11,071) (2,706)Financing activities 153,521 119,169 28,978 2,125
As of December 31 2006 2005 2004 2003
Balance Sheet Data:
Cash equivalents and short-term
investments $ 164,611 $ 71,489 $ 22,669 $ 716Total assets 1,106,242 212,354 56,415 5,306Shareholders’ equity (deficiency) 1,050,744 191,415 (5,573) 1,183
Jason Nan Chun JiangChairman of Board and Chief Executive Officer
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Letter to Shareholders
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TO OUr SHareHOLDerS:
Focus Media is a leader in new media in China. In 2006, we made significant progress in broadening our
media offerings, and further strengthened our ability to cover highly targeted consumer segments for our
advertising clients. We have achieved rapid growth as a leading brand in China’s new media market.
In 2006, Focus Media’s total revenue reached $211.9 million, an increase of 211% as compared to 2005.
Our operation profit in 2006 reached $80.4 million, a 253% increase as compared to 2005. Our net income in
2006 reached a record of $83.2 million.
In 2006, we continued to focus on media innovation and solidified our leadership in China’s new media
market. We see great opportunities brought by the digital media revolution in China. Through a series of
strategic investments and acquisitions, we have quickly established our strong leadership position in digital
out-of-home advertising, mobile handset advertising and Internet advertising. Today, we are the largest digital
media group in China.
Digital Out-of-home
In early 2006, we successfully acquired Target Media, the second-largest commercial location out-of-home
digital display advertisement operator in China, further consolidating China’s fast-growing out-of-home digital
display market. Our commercial location network now covers over 90 major cities in China including office
building channel A and B, travel channel, fashion channel, elite channel and various other sub-channels
targeting distinctively defined consumer audiences based on the needs of our advertising clients. In 2006, we
also developed our outdoor LED advertising network, covering street locations in key commercial and office
areas in Shanghai as an extension of our commercial location network coverage. We expect this business will
continue its strong growth in 2007.
In 2006, our in-store LCD network quickly expanded to cover approximately 4,000 retail stores, with an
installed base of approximately 40,000 LCD displays throughout China. This point-of-purchase digital media
has gained more and more attention from fast-moving-consumer-goods advertisers because it not only
improves advertiser’s brand recognition at point-of-purchase, but also influences impulse purchasing at point-
of-purchase. In 2006, as we continued to gain experience in this new media format, we made a series of
improvements to our in-store LCD placements and advertising programming catering to the needs of our
advertising clients. Our in-store network has gained more advertisers and its media effectiveness has been
recognized by the market.
In 2006, our poster frame advertising has demonstrated outstanding growth. In May 2007, we launched digital
frame 2.0, a digital media device with cutting-edge IT technologies. This new generation of digital media has
been widely appreciated by our advertising clients in terms of high quality visual impact, high flexibility, as well
as much larger data capability. The launch of our digital frame 2.0 marked the completion of digitization of
Focus Media’s out-of-home advertising business. Our highly-effective and highly-targeted digital out-of-home
advertising networks have been widely accepted by our advertising clients.
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Letter to Shareholders
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Mobile Handset advertising
In March 2006, Focus Media acquired Dotad, China’s largest WAP-based mobile advertising company,
and entered into the mobile handset advertising market. Given the more than 400 million mobile users in
China today, mobile handset advertising is increasingly being viewed as a media of great growth potential in
China. Our mobile advertising business, or Focus Media Wireless, consists of four major business models:
demographic-based advertisements through SMS, MMS and streaming video messaging; banner advertising
for wireless Internet through alliances with major WAP content providers in China and as the sole partner for
MSN mobile in China; advertisement-supported free ring-tone downloads; and other interactive marketing
services.
The effectiveness of Focus Media mobile advertising has quickly been recognized by our advertising clients
for its highly-targeted, timeliness media delivery and its interactivity. It has gained remarkable growth in 2006.
Based on over 400 million mobile users in China and given the expected deployment of 3G technology and
various new mobile technology applications, we believe our mobile advertising platform has great growth
potential.
Internet advertising
China’s Internet advertising market has been growing rapidly. In the first quarter of 2007, through the
acquisition of Allyes, the largest Internet advertising agency and provider of Internet advertising technology in
China, we quickly established our leadership in the Internet advertising market in China. Internet advertising
already accounted for more than 20% of our total revenues in the second quarter of 2007.
Since the completion of the Allyes acquisition, we have further consolidated the market through a series of
smaller acquisitions to build an integrated Internet advertising platform. Taking advantage of the existing large
advertising client base of Focus Media, our Internet business has grown its client base rapidly. Meanwhile,
a number of new attempts to improve the effectiveness of our Internet advertising service offerings, such as
targeted-marketing, rich media advertising and pay-by-performance pricing, have provided our advertising
clients with more value-added media solutions for interactive marketing. Such initiatives also allow Focus
Media to improve the margin of our Internet advertising business.
According to research on advertisers’ media purchasing trends, Internet advertising is among the most
important media, where advertisers will look to significantly increase their budget. We believe our Internet
advertising business, with its solid leadership in the market, will be a key growth driver for Focus Media going
forward.
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Letter to Shareholders
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The Digital advantage
Focus Media sees great opportunities ahead in a new media world. We believe digital media will continue
to be an increasing part of our life style and its huge growth potential far exceeds the traditional media. We
believe digital media:
• Results in higher consumer recall due to its audio-visual advantage;
• Offers more targeted advertising opportunities which leads to higher return on investment for
advertisers, especially for mobile handset and Internet based advertising;
• Provides more ways for interactive application; and
• Allows more flexible delivery of advertisement anywhere, anytime.
Focus Media in the Future
According to industry research, China is one of the fastest growing media markets in the world with total
advertising spending growing at a compound annual growth rate of 18.5% from 2005 to 2008. We believe this
trend will be further strengthened by the Beijing Olympics in 2008 and the World Expo in 2010. We believe
digital media will have higher growth potential than traditional media.
“Anywhere, Anytime, Anyscreen” digital media solution summarizes the goal of Focus Media. Today, Focus
Media has established a solid leadership position in digital out-of-home advertising, mobile handset advertising
and Internet advertising. By offering integrated media solutions across various digital media networks
based on extensive research of the needs of advertisers, we can provide greater return on investment for
our advertising clients by maximizing the effectiveness of various advertisement media. We will continue to
strengthen our leadership through strategic investments and acquisitions. We are committed to bringing the
best media solutions to our advertising clients.
We are confident in our future growth. We would like to share our excitement with you, our existing and
potential investors. We look forward to another exciting year of our growth.
Sincerely,
Jason Nan Chun Jiang
Chairman of Board and Chief Executive Officer
Focus Media Holding Limited
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Management’s Discussion and Analysis
You should read the following discussion and analysis of our financial condition and results of operations
in conjunction with our consolidated financial statements and the related notes included elsewhere in this
annual report. Our consolidated financial statements have been prepared in accordance with U.S. GAAP. In
addition, our consolidated financial statements and the financial data included in this annual report reflect our
reorganization and have been prepared as if our current corporate structure had been in place throughout the
relevant periods. The following discussion and analysis contains forward-looking statements that involve risks
and uncertainties detailed in our annual report on Form 20-F available on the U.S. Securities and Exchange
Commission website at www.sec.gov. Actual results could differ materially from those projected in the
forward-looking statements.
a. OvervIew
Our out-of-home advertising network consists of (i) our commercial location, in-store, outdoor LED
and movie theater networks, which we collectively refer to as our out-of-home television networks, (ii)
our poster frame network, (iii) our mobile handset advertising network and (iv) our Internet advertising
agency business. We have experienced significant revenue and earnings growth, and the size of our
network has grown significantly, since the commercial launch of our advertising network in May 2003.
The significant increase in our operating results since we commenced our current business operations
is attributable to a number of factors, including the substantial expansion of our flat-panel display
network, the launch and ongoing expansion of our in-store network, the commencement of operations
of our poster frame network, the successful execution of strategic acquisitions, such as our acquisition
of Framedia, Target Media, Focus Media Wireless and Allyes, and the growing acceptance of our multi-
platform network as an appealing advertising medium by our clients.
We expect our future growth to be driven by a number of factors and trends including:
• Overall economic growth in China, which we expect to contribute to an increase in advertising
spending in major urban areas in China where consumer spending is concentrated;
• Our ability to increase sales of advertising time slots and extend the duration of our advertising
cycle on our commercial location and in-store networks;
• Our ability to expand our client base through promotion of our services and cross-selling;
• Our ability to identify and create new advertising channels by establishing separate advertising
networks that enable advertisers to target a diverse range of consumer groups with specific
demographic profiles;
• Our ability to successfully enter into the mobile handset network advertising business, in part
through our recent acquisition of Focus Media Wireless;
• Our ability to successfully operate and market our new outdoor LED network;
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Management’s Discussion and Analysis
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• Our ability to successfully operate and market our new Internet advertising marketing and
technology agency; and
• Our ability to acquire companies that operate advertising businesses complementary to our
existing operations.
Because our primary source of revenue is our advertising service revenue, we focus on factors that
directly affect our advertising service revenue such as the number of advertising time slots that we have
available for sale and the price we charge for our advertising time slots after taking into account any
discounts.
As we continue to expand our network, we expect to face a number of challenges. We have expanded
our network rapidly, and we, as well as our competitors, have occupied many of the most desirable
locations in China’s major cities. In order to continue expanding our network in a manner that is
attractive to potential advertising clients, we may continue to enter into new advertising media platforms
and to establish additional stand-alone networks that provide effective channels for advertisers. In
addition, we must react to continuing technological innovations, such as the potential uses of wireless
and broadband technology in our network, and changes in the regulatory environment.
Our financial results for 2006 also include those of Framedia that we acquired on January 1, 2006, of
Target Media that we acquired on February 28, 2006 and, starting in the second quarter of 2006, those
of Focus Media Wireless that we acquired in March 2006. Starting in the second quarter of 2007, our
financial results will include those of Allyes, the acquisition of which we completed in March 2007.
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Management’s Discussion and Analysis
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revenues
In 2004, 2005 and 2006, we had total revenues of $29.2 million, $68.2 million and $211.9 million,
respectively. We generate revenues primarily from the sale of advertising time slots on our out-of-
home television advertising networks and, beginning in 2006, from the sale of frame space on our
poster frame network. Our advertising service revenue includes the sale of advertising time slots on
our network, as well as a small amount of revenue attributable to other advertising related services
we provide to our advertising clients. We also derive revenues from the sale of our flat-panel displays
to regional distributors, which we refer to as our advertising equipment revenue. In 2004, 2005 and
2006, our advertising service revenue accounted for 90.1%, 98.0% and 99.1% of our total revenues,
respectively. The following table sets forth a breakdown of our total revenues for the periods indicated:
For the year ended December 31,2004 2005 2006
$
% of total
revenues $
% of total
revenues $
% of total
revenues(in thousands of U.S. dollars, except percentages)
Net revenues: Commercial location
network (1) $ 26,321 90.1% $ 61,435 90.0% $ 132,061 62.3% In-store network (1) — — 5,469 8.0% 26,907 12.7% Poster frame network (1) — — — — 40,904 19.3% Mobile Handset Advertising Network — — — — 10,101 4.8%Advertising service revenue 26,321 90.1% 66,904 98.0% 209,973 99.1%
Other revenue 2,889 9.9% 1,325 2.0% 1,932 0.9%
Total revenues $ 29,210 100.0% $ 68,229 100.0% $ 211,905 100.0%
(1) Advertising service revenue is presented net of business tax, sales discounts and agency rebates. Business tax on advertising
service revenue from our commercial location network amounted to $2.8 million, $6.0 million and $13.6 million in 2004, 2005
and 2006, respectively. Business tax on advertising service revenue for our in-store network amounted to $2.8 million, in
2006. Business tax on advertising service revenue for our poster frame network amounted to $4.0 million for 2006. Business
tax includes business tax ranging from 3% — 5.55% and cultural industries tax ranging from 0% to 4.0%.
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Management’s Discussion and Analysis
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We also break down our total revenues into related-party and unrelated-party sources. The following
table presents a more detailed breakdown of our gross revenues and its component parts:
For the year ended December 31,2004 2005 2006
(in thousands of U.S. dollars, except percentages)
Revenue: Commercial Locations — Unrelated parties $ 25,386 86.9% $ 59,435 87.1% $ 130,474 61.6% — Related parties 3,723 12.7% 7,991 11.7% 15,228 7.2%
Total Commercial Locations 29,109 99.6% 67,426 98.8% 145,702 68.8% In-store Network — Unrelated parties — — 5,475 8.0% 25,330 12.0% — Related parties — — 518 0.8% 4,380 2.0%
Total in-store network — — 5,993 8.8% 29,710 14.0% Poster Frame Network — Unrelated parties — — — — 44,893 21.2% — Related parties — — — — — —
Total Poster Frame Network — — — — 44,893 21.2% Mobile Handset Advertising
Network — Unrelated parties — — — — 10,880 5.1% — Related parties — — — — — —
Total Mobile Handset
Advertising network — — — — 10,880 5.1%Gross Advertising Services
Revenue: 29,109 99.6% 73,419 107.6% 231,185 109.1% Less: Sales taxes: Commercial Locations 2,788 9.5% 5,991 8.8% 13,641 6.4% In-store Network — — 524 0.8% 2,803 1.3% Poster Frame Network — — — — 3,989 1.9% Mobile Handset Advertising
Network — — — — 779 0.4%
Total sales taxes 2,788 9.5% 6,515 9.6% 21,212 10.0%Net Advertising Service Revenue 26,321 90.1% 66,904 98.0% 209,973 99.1%Add:Other revenue: 2,889 9.9% 1,325 2.0% 1,932 0.9%
Net revenues: $ 29,210 100.0% $ 68,229 100.0% $ 211,905 100.0%
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Management’s Discussion and Analysis
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AdvertisingServiceRevenue
Sources of Revenues. We derive most of our total revenues from the sale of time slots on our
commercial location network and our in-store network to unrelated third parties and to some of our
related parties. We report our advertising revenue between related and unrelated parties because
historically more than 10% of our advertising service revenues came from clients related to some of our
directors. Our advertising services to related parties were provided in the ordinary course of business on
the same terms as those provided to our unrelated advertising clients on an arm’s-length basis.
Our advertising service revenue is recorded net of any sales discounts and agency rebates from
our standard advertising rate cards that we may provide to our advertising clients. These discounts
include volume discounts and other customary incentives offered to our advertising clients, including
additional broadcast time for their advertisements if we have unused time slots available in a particular
city’s advertising cycle, and represent the difference between our standard rate card and the amount
we charge our advertising clients. Our advertising clients include advertisers that directly engage in
advertisement placements with us and advertising agencies retained by some advertisers to place
advertisements on the advertiser’s behalf. We occasionally agree to pay advertising agency customers
sales rebates calculated on the revenues generated by them. We expect that our advertising service
revenue will continue to be the primary source, and constitute the substantial majority of, our revenues
for the foreseeable future.
Our advertising service revenue reflects a deduction for business taxes and related surcharges incurred
in connection with the operations of the Group. Their revenues are subject to a sales tax consisting of
approximately 5.55% business tax and a cultural industries tax ranging from 0% to 4.0% on revenues
earned from their advertising services provided in China. We deduct these amounts from our advertising
service revenues to arrive at our total revenues attributable to advertising services.
FactorsthatAffectOurAdvertisingServiceRevenue
Commercial location network. Our advertising service revenue derived from our commercial location
network is directly affected by:
• the number of advertising time slots that we have available to sell, which is mostly determined
by the number of cities in which we directly operate and the length of the advertising cycle,
which is currently twelve minutes. We calculate the number of time slots available by taking the
total advertising time available on our network during a particular period, calculated in aggregate
seconds, which we then divide by 30 to determine the number of 30-second equivalent time
slots available. We can increase the number of advertising time slots that we have available to
sell by expanding into additional cities or acquiring our regional distributors. The twelve-minute
advertising cycle amounts to the equivalent of 24 30-second time slots per week; and
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Management’s Discussion and Analysis
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• the average price we charge for our advertising time slots, which we calculate by dividing our
advertising service revenue by the number of 30-second equivalent time slots sold during that
period, after taking into account any discount offered. We calculate average quarterly advertising
service revenue for our Tier I, Tier II cities and as a blended average of all cities each quarter.
In-store network. Our advertising service revenue derived from our in-store network is directly affected
by:
• the number of advertising time slots that we have available to sell, which is determined by the
number of stores in which we operate, our expansion into additional stores, and the length of the
advertising cycle, which is currently twelve minutes, or 24 30-second equivalent time slots. As
with our commercial location network, for our in-store network we calculate the number of time
slots according to the number of 30-second equivalent time slots available; and
• the average price we charge for our advertising time slots, which we calculate by dividing our
advertising service revenue by the number of 30-second equivalent time slots sold during that
period, after taking into account any discount offered.
Poster frame network. Our advertising service revenue derived from our poster frame network is
directly affected by:
• the number of frames in our poster frame network. We sell frame space on our poster frame
network on a per frame basis. Increasing the number of residential and other locations on our
poster frame network allows us to increase the number of frames on our network, thereby
increases the available frame space for sale to advertisers; and
• the average price we charge for frame space on a per frame basis, after taking into account any
discount offered.
Mobile handset advertising network. Our advertising service revenue derived from our mobile handset
advertising network is directly affected by:
• the number of messages we deliver to mobile phone users. We charge fees based on the number
of successfully delivered messages; and
• the average price we charge per message.
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Management’s Discussion and Analysis
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MovieTheaterNetwork
Our advertising service revenue derived from our movie theater network is directly affected by:
• the number of advertising time slots that we have available to sell, which is determined by the
number of movie theaters in which we have leased screen time, our expansion into additional
theaters, and the length of the leased screen time, which is currently three minutes, or six
30-second equivalent time slots, per theater. As with our commercial location network and in-
store network we calculate the number of time slots according to the number of 30-second
equivalent time slots available; and
• the average price we charge per advertising time slot, which we calculate by dividing our
advertising service revenue by the number of 30-second equivalent time slots sold during that
period, after taking into account any discount offered.
InternetAdvertisingAgencyServices
As of April 1, 2007, we derive revenue from out Internet advertising agency business operated by Allyes.
Our advertising service revenue derived from our Internet advertising agency services is directly affected
by:
• the number of customers who purchase agency services from us. We agree to provide advertising
agency services and technology, and we charge fees based on the size and duration of the
advertising campaign and the number of daily impressions or “hits” on the Internet advertisement;
and
• Our ability to identify relevant Internet user traffic and deliver effective advertisements for our
advertising clients
Prices for time slots on our commercial location and in-store networks and for frame space on our
poster frame network also vary significantly from city to city as income levels, standards of living and
general economic conditions vary significantly from region to region in China, which in turn affect the
advertising rates we are able to charge for time slots and frame space.
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Management’s Discussion and Analysis
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Network Expansion. Many of the most desirable locations for our network have been occupied, either
by our network as a result of our expansion or by our competitors. As a result, we will need to rely on
means other than the rapid increase in the number of locations, flat-panel displays and advertising
poster frames in order to continue growing our revenues. We have focused, and expect to continue
to focus, on developing new channels in our out-of-home television advertising networks and entering
into new types of advertising media operations to continue to grow our revenues and to address these
potential capacity constraints on our existing network. In recent months, these steps have included: (1)
expanding our in-store network and (2) establishing discrete stand-alone channels on our commercial
location network, such as our premier A and B office building, travel, fashion, elite and healthcare
channels, enabling us to increase the number of time slots available for sale. We expect to continue
to explore opportunities to open up additional channels on our existing network and to enter into new
advertising media platforms in China. We believe these measures will enable us to continue the future
growth of our business. We have also expanded our advertising network with the addition of Framedia’s
poster frame network in January 2006. We intend to continue expanding our out-of-home advertising
network both through increasing the number of locations, displays and advertising poster frames
on our commercial location, in-store and poster frame networks and through strategic acquisition of
competitors and businesses that complement our existing out-of-home advertising network. Following
our acquisition of Target Media in February 2006, we expanded our network significantly by combining
Target Media’s flat-panel display network with our network. In addition, we entered into new advertising
platforms through Focus Media Wireless’ mobile handset advertising network and our outdoor LED
digital billboard network, and into Internet advertising agency services through our recent acquisition of
Allyes.
Seasonality. Our advertising service revenue is subject to key factors that affect the level of advertising
spending in China generally. In addition to fluctuations in advertising spending relating to general
economic and market conditions, advertising spending is also subject to fluctuations based on the
seasonality of consumer spending. In general, a disproportionately larger amount of advertising
spending is concentrated on product launches and promotional campaigns prior to the holiday season
in December. In addition, advertising spending generally tends to decrease in China during January
and February each year due to the Chinese Lunar New Year holiday as office buildings and other
commercial venues in China tend to be closed during the holiday. We believe this effect will be less
pronounced with regard to advertising spending on our in-store network, as we believe commercial
activity in hypermarkets and supermarkets is stable or even enhanced during the period of Chinese
Lunar New Year. We also experience a slight decrease in revenues during the hot summer months of
July and August each year, when there is a relative slowdown in overall commercial activity in urban
areas in China. Our past experience, although limited, indicates that our revenues would tend to be
lower in the first quarter and higher in the fourth quarter of each year, assuming other factors were to
remain constant, such as our advertising rates and the number of available time slots on our network.
We expect this effect to be partially offset by steady or enhanced advertising service revenue from our
in-store network, which we believe is less susceptible to the effects of seasonality than our commercial
location network, poster frame network and mobile handset advertising network.
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Revenue Recognition. We typically sign standard advertising contracts with our advertising clients,
which require us to run the advertiser’s advertisements on our network in specified cities for a specified
period, typically from four to twelve weeks. We recognize advertising service revenue ratably over the
performance period of the advertising contract, so long as collection of our fee remains probable. We
do not bill our advertising clients under these contracts until we perform the advertising service by
broadcasting the advertisement on our network. Revenue collected from our poster frame network is
recognized in substantially the same manner as revenues collected under the advertising contracts used
for our commercial location and in-store networks.
We generally collect our advertising service fees by billing our advertising clients within 60 to 90 days
after completion of the advertising contract and book these unbilled or unpaid amounts as accounts
receivable until we receive payment or determine the account receivable to be uncollectible. Target
Media’s accounts receivable historically remained outstanding for longer periods of time than ours. We
expect the average number of days outstanding for our accounts receivable to be higher as a result
of our acquiring Target Media’s accounts receivable. We expect the average period that our accounts
receivable will remain outstanding to revert to our historical levels after we begin to apply our accounts
receivable policy to Target Media’s accounts receivable.
Our accounts receivable are general unsecured obligations of our advertising clients and we do not
receive interest on unpaid amounts. We make specific reserves for accounts that we consider to be
uncollectible. We also provide a general reserve for uncollectible accounts that we reassess on an
annual basis. We made no provision for uncollectible accounts in 2003. In 2004, 2005 and 2006, we
made provision of $173,837, $396,657 and $1,308,554, respectively, for accounts receivable that
were outstanding for longer than six months. The average number of days outstanding of our accounts
receivable, including from related parties, was 66, 71 and 71, respectively, as of December 31, 2004,
2005 and 2006.
OtherRevenue
We also derive a portion of our total revenues from the sale of flat-panel displays to our regional
distributors on a cost-plus basis, and franchise fee which we record as other revenue. Other revenue
represented 9.9%, 2.0% and 0.9% of our total revenues in 2004, 2005 and 2006, respectively. Other
revenue derived from sale of flat-panel displays is recorded net of the 17% value added tax to which
equipment sales in China are subject. We expect that other revenue as a percentage of our total
revenues will continue to be low.
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Cost of revenues
Our cost of revenues consists of costs directly related to the offering of our advertising services and
costs related to our sales of advertising equipment.
The following table sets forth our cost of revenues, divided into its major components, by amount and
percentage of our total revenues for the periods indicated:
For the year ended December 31,2004 2005 2006
$
% of total
revenues $
% of total
revenues $
% of total
revenues(in thousands of U.S. dollars, except percentages)
Total revenues $ 29,210 100.0% $ 68,229 100.0% $ 211,905 100%Cost of revenues: Net advertising service cost: Commercial location
network 6,804 23.3% 18,325 26.9% 42,836 20.2% In-store network — — 7,423 10.9% 18,106 8.5% Poster frame network — — — — 13,621 6.4% Mobile Handset network — — — — 6,052 2.9%
Advertising service cost 6,804 23.3% 25,748 37.8% 80,615 38.0%Other cost 1,934 6.6% 976 1.4% 765 0.4%
Total cost of revenues 8,738 29.9% 26,724 39.2% 81,380 38.4%
Gross profit 20,472 70.1% 41,505 60.8% 130,525 61.6%
NetAdvertisingServiceCosts
Our cost of revenues related to the offering of our advertising services on our advertising network
consists of location costs, flat-panel display depreciation costs, amortization of acquired intangible
assets and other cost items, including salaries for and travel expenses incurred by our network
maintenance staff and costs for materials.
Our location costs for our out-of-home television networks consist of:
• rental fees and one-time signing payments we pay to landlords, property managers and stores
pursuant to the display placement agreements we enter into with them;
• commissions and public relations expenses we incur in connection with developing and
maintaining relationships with landlords and property managers; and
• maintenance fees for keeping our displays in proper operating condition.
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Generally, we capitalize the cost of our media displays and recognize depreciation costs on a straight-
line basis over the term of their useful lives, which we estimate to be five years. The primary factors
affecting our depreciation costs are the number of flat-panel displays in our network and the unit cost
for those displays, as well as the remaining useful life of the displays.
Amortization of acquired intangible assets consists operating and broadcasting rights, lease
agreements, completed technology and others. We expect our results of operations for a period of at
least seven years beginning in 2006 to be negatively affected by the amortization of intangible assets in
relation to, among other things, material contracts and customer lists as a result of several acquisitions,
particularly Framedia, Target Media and Dotad.
Our other cost of revenues consists of salary for and travel expenses incurred by our network
maintenance staff and costs for materials and maintenance in connection with the upkeep of our
advertising network. The primary factor affecting our other costs of revenues is the size of our network
maintenance staff. As the size of our network increases, we expect our network maintenance staff, and
associated costs, to increase in absolute terms, but to decrease as a percentage of total revenues.
Commercial Location Network. Location costs are the largest component of our cost of revenues for
our commercial location network. The primary factors affecting the amount of our location costs include
the number of display placement agreements we enter into and the rental fees we pay under those
agreements. We expect these costs to decrease as a percentage of our advertising service revenue for
our commercial location network in the future, as our advertising service revenue for our commercial
location network is expected to increase faster than the additional cost we incur from entering into
new display placement agreements and any increases we may experience in renewing existing display
placement agreements. However, when our display placement agreements expire, we may be unable to
renew these agreements on favorable terms and the rental fee portion of our location costs attributable
to these existing locations could increase. As we continue to increase the size of our network and as we
update and replace our existing displays with new technology, our depreciation costs in connection with
our commercial location network are expected to increase.
In-store Network. The primary costs of revenues connected with our in-store network are location
costs resulting from rental and maintenance fees and depreciation costs for our displays. We expect
these costs to continue to increase in 2006 as we expand our in-store network and to decrease as a
percentage of advertising service revenue for our in-store network.
Poster Frame Network. The primary costs of revenues connected with our poster frame network are
location costs resulting from rental fees. Depreciation costs for our frames and other costs for salary
and maintenance fees also account for a significant portion of cost of revenues for our poster frame
network. We expect these costs to increase in 2006 as we expand our poster frame network but to
decrease as a percentage of advertising service revenue for our poster frame network.
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OtherCosts
Other costs consists of the amounts we pay to the contract assembler who purchases the components
and assembles them into the flat-panel displays we sell to our regional distributors. Other costs
accounted for 6.6%, 1.4% and 0.4% of our total revenues in 2004, 2005 and 2006, respectively. The
primary factors affecting other costs are the number of flat-panel displays we sell and the unit cost we
pay to our contract assembler for each such flat-panel display.
OperatingExpensesandNetIncome
Our operating expenses consist of general and administrative, selling and marketing expenses, other
operating income. In 2004, our operating expenses also included a goodwill impairment loss. The
following table sets forth our operating expenses, divided into their major categories by amount and as
a percentage of our total revenues for the periods indicated.
For the year ended December 31,2004 2005 2006
$
% of total
revenues $
% of total
revenues $
% of total
revenues(in thousands of U.S. dollars, except percentages)
Gross profit $ 20,472 70.1% $ 41,505 60.8% $ 130,525 61.6%Operating expenses: General and
administrative 3,988 13.7% 9,120 13.4% 25,723 12.1% Selling and marketing 3,473 11.9% 9,599 14.0% 25,762 12.2%
For the year ended December 31,2004 2005 2006
$
% of total
revenues $
% of total
revenues $
% of total
revenues(in thousands of U.S. dollars, except percentages)
Other operating income — 0.0% — 0.0% (1,338) (0.6)%Goodwill impairment
loss 58 0.2% — — — —
Total 7,519 25.8% 18,719 27.4% 50,147 23.7%
Income from operations 12,953 44.3% 22,786 33.4% 80,378 37.9%
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General and Administrative. General and administrative expenses primarily consist of salary and
benefits for management and finance and administrative staff personnel, business tax mainly relating to
license fees paid by our affiliated PRC companies to Focus Media Advertisement and to Focus Media
Digital, office rental, maintenance and utilities expenses, depreciation of office equipment, other office
expenses and professional services fees. General and administrative expenses accounted for 13.7%,
13.4% and 12.1% of our total revenues in 2004, 2005 and 2006, respectively. Salaries and benefits
accounted for 20.2%, 26.9% and 23.3% of our general and administrative expenses in 2004, 2005 and
2006, respectively. We expect that our general and administrative expenses will be relatively stable as
a percentage of total revenues in the near term but to increase in absolute terms as we hire additional
personnel and incur additional costs in connection with the expansion of our business and with being a
publicly traded company, including costs of enhancing our internal controls.
Selling and Marketing. Our selling and marketing expenses primarily consist of salaries and benefits,
including share-based compensation expense for our sales staff, marketing and promotional expenses,
amortization of certain acquired intangible assets such as customer base, and other costs related to
supporting our sales force. Selling and marketing expenses accounted for 11.9%, 14.0% and 12.2%
of our total revenues in 2004, 2005 and 2006, respectively. As we acquired more of our regional
distributors, continue to expand our client base and have commenced operation of new advertising
platforms, we increased our sales force, which resulted in an increase in salary expenses. We now
budget approximately 13% of our advertising revenues to be used for selling and marketing in 2007. We
expect selling and marketing expenses to remain relatively stable as a percentage of total revenues.
Share-based Compensation. Prior to 2006, our share-based compensation expense relating to general
and administrative and selling and marketing primarily consists of the amortized portion of deferred
share-based compensation recognized by us. We issued options representing 10.87% of our issued
share capital under our 2003 Employee Share Option Scheme, or the 2003 Option Plan. In addition,
we have issued options representing 3.95% of our issued share capital under our 2005 Share Option
Plan, or the 2005 Option Plan. Our share-based compensation relating to general and administrative
accounted for 11.6%, 7.5% and 23.8% of our general and administrative expenses in 2004, 2005 and
2006, respectively. Share-based compensation relating to selling and marketing accounted for 0.8%,
0.5% and 8.1% of our selling and marketing expenses in 2004, 2005 and 2006, respectively The share-
based compensation have increased following the effectiveness, as of January 2006, of Statement
of Financial Accounting Standards No. 123(R) relating to share-based compensation. As a result, we
recorded total share-based compensation expense of $8.4 million for 2006.
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Critical accounting Policies
We prepare our financial statements in conformity with U.S. GAAP, which requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities on the date of the financial statements and the reported amounts of revenues
and expenses during the financial reporting period. We continually evaluate these estimates and
assumptions based on the most recently available information, our own historical experience and on
various other assumptions that we believe to be reasonable under the circumstances. Since the use
of estimates is an integral component of the financial reporting process, actual results could differ from
those estimates. Some of our accounting policies require higher degrees of judgment than others in
their application. We consider the policies discussed below to be critical to an understanding of our
financial statements as their application places the most significant demands on our management’s
judgment.
Share-basedCompensation
Through 2005, we accounted for our share option plan using the intrinsic value method under
Accounting Principles Board, or APB, No. 25. Effective the beginning of 2006, we adopted Statement
of Financial Accounting Standards, or SFAS, No. 123-R, “Share-Based Payment”, and elected to adopt
the modified prospective application method. SFAS No. 123-R requires us to use a fair-value based
method to account for share-based compensation. Accordingly, share-based expense is measured at
the grant date, based on the fair value of the award, and is recognized as expense over the employees’
requisite service period. Our share option plans are described in Note 10 to our consolidated financial
statements.
We estimated the fair value of share options granted using the Black-Scholes-Merton option pricing
model, which requires the input of highly subjective assumptions, including the estimated expected
life of the share options, estimated forfeitures and the price volatility of the underlying shares. The
assumptions used in calculating the fair value of share options represent management’s best estimates,
but these estimates involve inherent uncertainties and the application of management judgement. As
a result, if factors change and we use different assumptions, our share-based compensation expense
could be materially different in the future. In addition, we estimate our expected forfeiture rate and
recognize the expense only for those shares expected to vest. These estimations are based on past
employee retention rates and our expectations of future retention rates. We will prospectively revise our
estimated forfeiture rates based on actual history. Our compensation expense may change based on
changes to our actual forfeitures of these share options.
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IncomeTaxes
We account for income taxes under the provisions of SFAS No. 109, “Accounting for Income Taxes”,
with the required disclosures as described in Note 11 to our consolidated financial statements. We
record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more
likely than not to be realized. In the event we were to determine that we would be able to realize our
deferred tax assets in the future in excess of their recorded amount, an adjustment to our deferred
tax assets would increase our income in the period such determination was made. Likewise, if we
determine that we would not be able to realize all or part of our net deferred tax assets in the future, an
adjustment to our deferred tax assets would be charged to our income in the period such determination
is made. We record income tax expense on our taxable income using the balance sheet liability method
at the effective rate applicable to each of our affiliated entities in China in our consolidated statements of
operations and comprehensive income.
GoodwillandLong-livedassetsImpairment
We test goodwill for possible impairment on an annual basis as of December 31 of each year and at any
other time if an event occurs or circumstances change that would more likely than not reduce the fair
value of a reporting unit below its carrying amount. Circumstances that could trigger an impairment test
between annual tests include, but are not limited to:
• a significant adverse change in the business climate or legal factors;
• an adverse action or assessment by a regulator;
• unanticipated competition;
• loss of key personnel;
• the likelihood that a reporting unit or a significant portion of a reporting unit will be sold or
disposed of;
• a change in reportable segments;
• results of testing for recoverability of a significant asset group within a reporting unit; and/or
As of December 31, 2004, 2005 and 2006, we had a goodwill balance of $9.1 million, $13.3 million
and $739.7 million, respectively, which is not deductible for tax purposes. We incurred a goodwill
impairment loss of $58,397 in 2004 in connection with our acquisition of Perfect Media which is part of
the commercial location reporting segment. In conducting our annual impairment test, we undertook
a valuation of Perfect Media using the expected present value of cash flow and the income approach
valuation methods, which resulted in a goodwill impairment loss of $58,397 in 2004, indicating that the
value of Perfect Media was less than what we paid at the time we acquired it.
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The fair value of each reporting unit is determined by allocating our total fair value among our reporting
units using a combination of income approach and market approach. We may incur additional goodwill
impairment charges in the future although we cannot predict whether this will occur when we perform
our goodwill impairment test each year.
We test long-lived assets for possible impairment if an event occurs or circumstances change that
would more likely than not reduce the fair value of an asset group below its carrying amount. Asset
recoverability is an area involving management judgement, requiring assessment in two steps as to
whether the carrying value of assets can be supported by the undiscounted future cash flows and the
net present value of future cash flows derived from such assets using cash flow projections which have
been discounted at an appropriate rate. In calculating the net present value of the future cash flows,
certain assumptions are required to be made in respect of highly uncertain matters such as revenue
growth rates, gross margin percentages and terminal growth rates.
Taxation
CaymanIslands,theBritishVirginIslandsandHongKong
Under the current laws of the Cayman Islands, the British Virgin Islands and Hong Kong, neither
Focus Media Holding Limited, incorporated in the Cayman Islands, nor Infoachieve Limited and Dotad
Holdings Limited, incorporated in the British Virgin Islands, are subject to tax on its income or capital
gains. Focus Media Hong Kong, our wholly owned subsidiary incorporated in Hong Kong, is subject
to profits tax rate of 17.5% on its assessable profits, yet interest derived from deposits placed in Hong
Kong with authorized institutions are exempted from the Hong Kong profits tax. In addition, payment of
dividends by either company is not subject to withholding tax in those jurisdictions.
PRC
Our PRC entities are subject to PRC business tax. We primarily pay business tax on gross revenues
generated from our advertising services. Focus Media Advertisement and its subsidiaries, and New
Focus Media Advertisement, New Focus Media Agency, Focus Media Defeng Advertisment and
Framedia Advertisement, pay a 5% business tax, whereas Focus Media Wireless pays a 3% business
tax on the gross revenues derived from advertising services and this business tax is deducted from
total revenues in calculating the net revenues. Focus Media Technology and Focus Media Digital pay a
5% business tax on the gross revenues derived from their contractual arrangements with Focus Media
Advertisement and its subsidiaries and these taxes are primarily recorded in operating expenses.
In addition to business tax and cultural industries tax imposed on our advertising business and VAT
imposed on our sales of advertising equipment. Focus Media Technology, Focus Media Digital and
Focus Media Advertisement and its subsidiaries, including Focus Media Advertising Agency and New
Focus Media Advertisement, are subject to PRC enterprise income tax on their taxable income, except
to the extent some of them enjoy temporary tax exempt status as described in further detail below.
�4
Management’s Discussion and Analysis
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Pursuant to PRC law, enterprise income tax is generally assessed at the rate of 33% of taxable income.
Focus Media Technology, Focus Media Digital, Focus Media Advertisement and its subsidiaries and New
Focus Media Advertisement are currently subject to this 33% enterprise income tax. State Administration
of Taxation and its delegates of the PRC are authorized to grant an exemption from enterprise income
tax of up to two years to newly established domestic companies that have no direct foreign ownership
and that are financially independent and engaged in consulting services, technology services or the
information industry, which includes advertising services. A qualifying company must apply for this tax-
exempt status for each of the two years separately. Focus Media Digital and Focus Media Advertising
Agency were established in October 2004 and both were granted exemptions from enterprise income
tax in 2004 and 2005. In 2006 and 2007, we continued our tax exempt status through New Focus
Media Advertisement, New Focus Media Agency, Focus Media Defeng Advertisment, New Structure
Advertisement and Focus Media Wireless, which were established during the period from October 2005
to June 2006 and have obtained tax-exempt approval for 2006 and 2007.
In November 2004, Focus Media Technology, Focus Media Advertisement and some of its subsidiaries
sold all of their flat-panel display equipment to Focus Media Digital at fair market value. As a result of this
sale, Focus Media Technology and Focus Media Advertisement recorded a non-cash charge to earnings
in the aggregate of $4,773,030 in the fourth quarter of 2004, which reflected the difference between the
fair market value of the equipment and its then current book value. In addition, since its establishment,
through December 31, 2005, Focus Media Advertising Agency has generated revenue by selling time
slots on our advertising network and pays a dissemination fee to Focus Media Advertisement and its
certain subsidiaries, which places advertisements for Focus Media Advertising Agency’s clients on our
network. Finally, Focus Media Agency also license technology used in our business operations from
Focus Media Digital in exchange for license fees paid to Focus Media Digital. As a result of Focus Media
Agency’s amortization of the license fee paid to Focus Media Digital, it incurred a charge to earnings
of $3.7 million in the fourth quarter of 2004. See “Item 7.B Major Shareholders and Related Party
Transactions — Related Party Transactions” for further information on these transactions and contractual
agreements. Although these transactions were eliminated upon consolidation as transactions among
members of our consolidated companies for financial accounting purposes, they did have the affect of
reducing our total income tax expense and increasing our after tax net income in 2004.
As a result of these transactions, our effective tax rates were 71.6% and 2.8% in 2004 and 2005,
respectively. Excluding the non-recurring non-cash charge resulting from the change in fair value of
derivative liability associated with Series B convertible redeemable preference shares and goodwill
impairment loss, our effective tax rate for 2004 would have been 7.0%. The tax savings resulting from
the non-cash charge to earnings from the write-down of flat-panel display equipment in 2004 and the
charge to earnings from the amortization of the license fee paid in 2004 will not continue in the future.
In December 2005, we established New Focus Media Advertisement which has received tax-
exempt approval for 2006 and 2007. We further incorporated New Focus Media Agency and Focus
Media Defeng Advertisement in 2006 which also received tax-exempt approval for 2006 and 2007.
Besides, New Structure Advertisement, which incorporated in October 2005, also received its tax-
exempt approval for 2006 and 2007. Focus Media Wireless, as a high-tech company incorporated in
Zhonguancun District, Beijing, China, is exempted from income tax from 2006 to 2008, plus a 50%
reduction holiday from 2009 to 2011.
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Management’s Discussion and Analysis
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In December 2005, Focus Media Digital sold all of its flat-panel display equipment to New Focus Media
Advertisement at fair market value and Focus Media Digital sold all of its technology to New Focus Media
Advertisement in January 2006 at a fixed fee. As of January 2006, New Focus Media Advertisement
generates revenue by selling time slots on our advertising network and pays a dissemination fee to
Focus Media Advertisement and its certain subsidiaries, which places advertisements for New Focus
Media Advertisement’s clients on our network. Both New Focus Media Agency and Focus Media Defeng
Advertisement act as advertising agencies for New Focus Media Advertisement and receives agency
fees. While these transactions to be eliminated upon consolidation as transactions among members of
our consolidated companies for financial accounting purposes, as a result, our effective tax rate was 1.3%
for 2006. We also expect these transactions will reduce our total income tax expense and increasing
our after tax net income in 2007. See “Item 7.B Major Shareholders and Related Party Transactions —
Related Party Transactions” for further information on these transactions and contractual agreements. In
addition, upon expiration of these tax exemptions, we will consider available options, in accordance with
applicable law, that would enable us to qualify for further tax exemptions, if any, to the extent they are
then available to us.
Under PRC law, arrangements and transactions among related parties may be subject to audit or
challenge by the PRC tax authorities. If any of the transactions described above are found not to be
on an arm’s-length basis, or to result in an unreasonable reduction in tax under PRC law, the PRC tax
authorities have the authority to disallow our tax savings, adjust the profits and losses of our respective
PRC entities and assess late-payment interest and penalties. A finding by the PRC tax authorities that
we are ineligible for the tax savings we achieved in 2004, 2005 and 2006, or that we expect to achieve
in 2007, or that Focus Media Digital, Focus Media Advertising Agency, New Focus Media Advertisement,
New Structure Advertisement, or Framedia Advertisement are ineligible for their tax exemptions, would
substantially increase our taxes owed and reduce our net income and the value of your investment. As
a result of this risk, you should evaluate our results of operations and financial condition without regard
to these tax savings. See “Item 3.D Key Information — Risk Factors — Risks Relating to Regulation
of Our Business and to Our Structure — Contractual arrangements we have entered into among our
subsidiaries and affiliated entities may be subject to scrutiny by the PRC tax authorities and a finding
that we owe additional taxes or are ineligible for our tax exemption, or both, could substantially increase
our taxes owed, and reduce our net income and the value of your investment.”
On March 16, 2007, the PRC National People’s Congress passed the China Corporate Income Tax
Law which will change the income tax rates for most enterprises from 33% at the present to 25%. This
new law will become effective on January 1, 2008. There will be a transition period for enterprises,
whether foreign-invested or domestic, which currently receive preferential tax treatments granted by
relevant tax authorities. Enterprises that are subject to an enterprise income tax rate lower than 25%
may continue to enjoy the lower rate and gradually transition to the new tax rate within five years after
the effective date of the new law. Enterprises that are currently entitled to exemptions or reductions
from the standard income tax rate for a fixed term may continue to enjoy such treatment until the fixed
term expires. Preferential tax treatments will continue to be granted to industries and projects that
are strongly supported and encouraged by the state, and enterprises that qualify as “new and high
technology enterprises strongly supported by the state” will be entitled to a 15% enterprise income tax
rate.
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Most of the Company’s subsidiaries and VIEs are expected to transition from 33% to 25% starting
from January 1, 2008. Those that currently enjoy a lower tax rate of 15% will gradually transition to the
uniform tax rate of 25% from 2008 to 2012 unless the company obtains the “new and high technology
enterprise” status under the new tax law.
recently Issued accounting Standards
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which
defines fair value, establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS 157 applies under most other
accounting pronouncements that require or permit fair value measurements and does not require any
new fair value measurements. This statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years, with earlier application
encouraged. The provisions of SFAS 157 should be applied prospectively as of the beginning of the
fiscal year in which the statement is initially applied, except for a limited form of retrospective application
for certain financial instruments. The Group is currently evaluating the impact, if any, of this statement on
the consolidated combined financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, (“SFAS 159”). SFAS No. 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007.
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”
(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”.
FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48
also provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.
The Company adopted FIN 48 on January 1, 2007 and estimated the cumulative effect on adoption of
FIN48 to be a reduction of consolidated retained earnings as of January 1, 2007 of approximately $1.5
million approximately.
In June 2006, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 06-3, “How
Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in
the Income Statement (That Is, Gross Versus Net Presentation)” (“EITF 06-3”). The scope of EITF 06-3
includes sales, use, value added and some excise taxes that are assessed by a governmental authority
on specific revenue-producing transactions between a seller and customer. EITF 06-3 states that a
company should disclose its accounting policy (i.e. gross or net presentation) regarding the presentation
of taxes within its scope, and if significant, these disclosures should be applied retrospectively to the
financial statements for all periods presented. EITF 06-3 is effective for interim and annual reporting
periods beginning after December 15, 2006. The Group is currently evaluating the impact, if any, of this
statement on its consolidated combined financial statements and related disclosures.
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acquisitions
Since we commenced our current business operations in May 2003, we have acquired numerous
companies to expand the coverage of our network in China and to acquire businesses that are
complementary to our operations. See “Item 10.C Additional Information — Material Contracts”.
Some of the businesses we acquired had entities located both in and outside of China. The
consideration we paid for these businesses was made in two parts, one part for the entity located
in China, and the other part for the entity located outside of China. For consideration paid to acquire
entities located in China, we withheld on behalf of sellers who are natural persons 20% of the amount
by which the acquisition price exceeded the registered capital of such PRC entity as required under the
PRC Individual Income Tax Law and related implementation rules. We were not required to and did not
withhold any tax in connection with payments made to acquire the entities located outside of China.
See “Item 3.D Key Information — Risk Factors — Risks Relating to the People’s Republic of China —
The PRC tax authorities may require us to pay additional taxes in connection with our acquisitions of
offshore entities that conducted their PRC operations through their affiliates in China”.
The financial statements of:
• Infoachieve Limited, for the periods ended, and as of, December 31, 2003, 2004 and 2005;
• Target Media Holdings, for the periods ended, and as of, December 31, 2004 and 2005;
• Perfect Media Holding Ltd. for the periods ended, and as of, December 31, 2003 and September
30, 2004;
• Focus Media Changsha Holding Ltd., Focus Media Qingdao Holding Ltd. and Focus Media Dalian
Holding Ltd. for the period ended, and as of, October 31, 2004; and
• Capital Beyond Limited for the periods ended, and as of, December 31, 2004 and March 31,
2005, respectively, are available in our registration statement on Form F-1 (File No. 333-134714).
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Management’s Discussion and Analysis
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Quarterly results of Operation
The following tables present unaudited consolidated quarterly financial data by amount and as a
percentage of our total revenues for each of the eight quarters in the period from March 31, 2005 to
December 31, 2006. You should read the following table in conjunction with our audited consolidated
financial statements and related notes included elsewhere in this annual report. We have prepared the
unaudited consolidated quarterly financial information on substantially the same basis as our audited
consolidated financial statements and using information derived from our unaudited consolidated
financial statements which are not included in this annual report. The following information contains
normal recurring adjustments which are, in the opinion of our management, necessary for a fair
presentation of the results for such unaudited period. Our operating results for any quarter are not
necessarily indicative of results that may be expected for any future period.
For the three months ended
Consolidated Statement of
Operations Data
March 31,
2005
June 30,
2005
September 30,
2005
December 31,
2005
March 31,
2006
June 30,
2006
September 30,
2006
December 31,
2006
(in thousands of U.S. dollars)
Net revenues:
Commercial location network (1) 9,432 13,981 17,287 20,735 21,380 30,438 38,519 41,724
In-store network (1) — 339 1,813 3,317 5,294 6,538 7,239 7,836
Poster frame network (1) — — — — 6,067 9,778 11,284 13,775
Mobile Handset
Advertising Network (1) — — — — — 3,076 3,516 3,509
Total advertising service revenue 9,432 14,320 19,100 24,052 32,741 49,830 60,558 66,844
Other revenue 142 264 366 553 457 233 90 1,152
Total revenues 9,574 14,584 19,466 24,605 33,198 50,063 60,648 67,996
Cost of revenues:
Commercial location network 3,247 4,174 5,047 5,857 8,226 11,487 11,404 11,719
In-store network — 1,366 2,606 3,451 3,973 4,394 4,616 5,123
Poster frame network — — — — 2,792 3,222 3,756 3,851
Mobile Handset
Advertising network — — — — — 2,405 2,219 1,428
Advertising service cost: 3,247 5,540 7,653 9,308 14,991 21,508 21,995 22,121
Other cost 71 188 285 432 232 80 80 373
Total cost of revenues 3,318 5,728 7,938 9,740 15,223 21,588 22,075 22,494
Gross profit 6,256 8,856 11,528 14,865 17,975 28,475 38,573 45,502
Operating expenses:
General and administrative 1,867 2,331 2,337 2,585 4,395 6,298 5,956 9,074
Selling and marketing 1,515 1,984 2,719 3,381 4,407 5,376 6,784 9,195
Other operating income — — — — (20) (137) (5) (1,176)
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For the three months ended
Consolidated Statement of
Operations Data
March 31,
2005
June 30,
2005
September 30,
2005
December 31,
2005
March 31,
2006
June 30,
2006
September 30,
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December 31,
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(in thousands of U.S. dollars)
Total operating expenses 3,382 4,315 5,056 5,966 8,782 11,537 12,735 17,093
Income from operations 2,874 4,541 6,472 8,899 9,193 16,938 25,838 28,409
Interest income (expenses), net 12 20 791 939 888 605 1,070 1,692
Other income (expenses), net 5 (3) 8 (171) (71) (408) (175) 367
Income before income taxes
and minority interest 2,891 4,558 7,271 9,667 10,010 17,135 26,733 30,468
Total income taxes (248) (155) (87) (204) (617) (373) 317 (371)
Minority interests — (55) (52) (38) 40 (91) (45) (9)
Net income attributed to
shareholders 2,643 4,348 7,132 9,425 9,433 16,671 27,005 30,088
(1) Advertising service revenue is presented net of sales taxes, the following tables presents the unaudited quarterly sales taxes
information:
For the three months ended
March 31, 2005
June 30, 2005
September 30, 2005
December 31, 2005
March 31, 2006
June 30, 2006
September 30, 2006
December 31, 2006
(in thousands of U.S. dollars)
Sales taxes:
Commercial location network $ 936 $ 1,419 $ 1,769 $ 1,867 $ 2,082 $ 2,968 $ 4,062 $ 4,529
In-store network — 34 187 304 524 697 763 819
Poster frame network — — — — 591 958 1,102 1,338
Mobile Handset Advertising Network — — — — — 289 285 205
Total $ 936 $ 1,453 $ 1,956 $ 2,171 $ 3,197 $ 4,912 $ 6,212 $ 6,891
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Management’s Discussion and Analysis
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For the three months ended
Consolidated Statement of Operations Data
March 31, 2005
June 30, 2005
September 30, 2005
December 31, 2005
March 31, 2006
June 30, 2006
September 30, 2006
December 31, 2006
(in thousands of U.S dollars)
Net revenues:
Commercial location network 98.5% 95.9% 88.8% 84.3% 64.4% 60.8% 63.6% 61.4%
In-store network — 2.3% 9.3% 13.5% 15.9% 13.1% 11.9% 11.5%
Poster frame network — — — — 18.3% 19.5% 18.6% 20.2%
Mobile Handset Advertising Network — — — — — 6.1% 5.8% 5.2%
Other revenues 1.5% 1.8% 1.9% 2.2% 1.4% 0.5% 0.1% 1.7%
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues:
Net advertising service cost:
Commercial location network 34.0% 28.6% 25.9% 23.8% 24.8% 22.9% 18.8% 17.2%
In-store network — 9.4% 13.4% 14.0% 12.0% 8.8% 7.6% 7.5%
Poster frame network — — — — 8.4% 6.4% 6.2% 5.7%
Mobile Handset Advertising Network — — — — — 4.8% 3.7% 2.1%
Other costs 0.7% 1.3% 1.5% 1.8% 0.7% 0.2% 0.1% 0.5%
Total cost of revenues 34.7% 39.3% 40.8% 39.6% 45.9% 43.1% 36.4% 33.0%
Gross profit 65.3% 60.7% 59.2% 60.4% 54.1% 56.9% 63.6% 67.0%
Operating expenses:
General and administrative 19.5% 16.0% 12.0% 10.5% 13.2% 12.6% 9.8% 13.3%
Selling and marketing 15.8% 13.6% 14.0% 13.7% 13.3% 10.7% 11.2% 13.5%
Other operating income — — — — (0.06)% (0.3)% (0.0)% (1.7)%
Total operating expenses 35.3% 29.6% 26.0% 24.2% 26.4% 23.0% 21.0% 25.1%
Income from operations 30.0% 31.1% 33.2% 36.2% 27.7% 33.9% 42.6% 41.9%
Interest income (expenses), net 0.1% 0.1% 4.1% 3.8% 2.7% 1.2% 1.8% 2.5%
Other income (expenses), net 0.1% — 0.1% (0.7)% (0.2)% (0.8)% (0.3)% 0.5%
Income before income taxes and minority interest 30.2% 31.2% 37.4% 39.3% 30.2% 34.3% 44.1% 44.9%
Total income taxes (2.6)% (1.0)% (0.4)% (0.8)% (1.9)% (0.7)% 0.5% (0.5)%
Minority interest 0% (0.4)% (0.3)% (0.2)% 0.1% (0.2)% (0.1)% 0.0%
Net income attributable to shareholders 27.6% 29.8% 36.7% 38.3% 28.4% 33.4% 44.5% 44.4%
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(1) Advertising service revenue is presented net of sales taxes: the following table presents the unaudited quarterly percentage of
sales taxes against gross revenues:
For the three months ended
March 31, 2005
June 30, 2005
September 30, 2005
December 31, 2005
March 31, 2006
June 30, 2006
September 30, 2006
December 31, 2006
(in thousands of U.S. dollars)
Sales taxes:
Commercial location network 9.0% 9.2% 9.3% 8.3% 8.9% 8.9% 9.5% 9.8%
In-store network — 9.1% 9.4% 8.4% 9.0% 9.6% 9.5% 9.5%
Poster frame network — — — — 8.9% 8.9% 8.9% 8.9%
Mobile Handset
Advertising Network — — — — — 8.6% 7.5% 5.5%
Total 9.0% 9.2% 9.3% 8.3% 8.9% 9.0% 9.3% 9.3%
Certain quarterly financial information related to the each fiscal quarters of the fiscal year ended
December 31, 2006 have been restated and differ from previously announced information in the Forms
6-K furnished to the SEC on May 26, 2006, August 21, 2006, November 20, 2006 and February 26,
2007 as a result of the following:
Advertising agency rebates for each fiscal quarter of the fiscal year ended December 31, 2006. We
classified $88,537, $624,365, $425,807 and $257, 205 advertising agency rebates, respectively,
as selling expenses rather than as a reduction of revenues in the quarter ended March 31, June 30,
September 30 and December 31, 2006, respectively. This adjustment resulted in a decrease in the
originally reported gross margin and a decrease to reported selling expenses from our filings on Form 6-K
dated May 26, 2006, August 21, 2006, November 20, 2006 and February 26, 2007, respectively. The
foregoing restated amounts did not affect net income or earnings per share.
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Management’s Discussion and Analysis
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B. OPeraTING reSULTS
results of Operations
YearEndedDecember31,2006ComparedtoYearEndedDecember31,2005
TotalRevenues. Our total revenues increased substantially from $68.2 million in 2005 to $211.9
million in 2006 due to an increase in our advertising service revenue.
Our total advertising service revenue increased significantly from $66.9 million in 2005 to $210.0 million
in 2006, including the advertising service revenues derived from in-elevator poster frame advertising
network amounting to $40.9 million and $10.1 million from mobile handset advertising network primarily
as a result of our acquisitions in 2006.
Commercial location network. Advertising service revenue from our commercial location network
increased significantly from $61.4 million in 2005 to $132.1 million, including $13.8 million to related
parties in 2006. The increase in advertising service revenue for our commercial location network is
attributable to:
• an increase in the number of 30-second-equivalent advertising time slots we sold on our
commercial location network, from 13,943 in 2005 to 23,917 in 2006, as well as the increase in
the average selling price per time slot sold, from $4,461 in 2005 to $5,522 in 2006. Total network
capacity, measured by number of available time slots, also increased from 9,028 as of December
31, 2005 to 15,939 as of December 31, 2006.
• Our network reach increased from 58 cities as of December 31, 2005, including 26 cities directly
operated by our company and 32 cities operated by our regional distributors, to 91 cities as of
December 31, 2006, including 51 cities directly operated by our company and 40 cities operated
by our regional distributors;
• We gained an additional seven minutes of advertising cycle time from each of our regional
distributors after we acquired them between January 1, 2005 and December 31, 2005; and
• On July 1, 2005, we extended the cycle time in our directly operated Tier II cities from nine
minutes to twelve minutes.
• The increase in the number of 30-second-equivalent advertising time slots sold on our commercial
location network was also attributable to increased acceptance of our network among our
advertising clients, which we believe is primarily due to the increased coverage and effectiveness
of our network that grew from 48,226 flat-panel displays as of December 31, 2005 to 80,263
displays as of December 31, 2006, including our regional distributors.
• The increase in the average selling price was largely due to increased demand for time slots with
higher selling prices in our Tier II cities, while the average selling price of our advertising services
in our Tier I cities increased between these two periods.
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Management’s Discussion and Analysis
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In-store network. Advertising service revenue from our in-store network, which commenced operations
in April 2005, totaled $26.9 million in 2006. We expect the contribution to our total revenues from our
in-store network to increase in the near future.
Other revenues increased from $1.3 million in 2005 to $1.9 million in 2006, primarily from license fees
that we received from our oversea franchise companies. By the end of 2006, we granted licenses to
approximately 10 oversea franchise companies using the Focus Media brand in operating local LCD
advertising networks in India, Malaysia, Indonesia, the Philippines, the Gulf Cooperation Council region
(including Saudi Arabia), HongKong, Taiwan and Singapore.
CostofRevenues. Our cost of revenues increased significantly from $26.7 million in 2005 to $81.4
million in 2006 due to increases in our net advertising service cost for our commercial location network,
our in-store network and two new business lines: our poster frame network and mobile handset
advertising network.
• Net advertising service cost — commercial location network. Our net advertising services cost
for our commercial location network increased substantially from $18.3 million in 2005 to $42.8
million in 2006. This increase was due to the substantial increase in our advertising service
business on our commercial location network between these two periods. Our location costs
increased substantially from $11.3 million in 2005 to $25.8 million in 2006 due to a substantial
increase in the number of commercial locations where we entered into display placement
agreements. Our rental fees increased as a percentage of total revenues between these two
periods as a result of (1) a significant increase in the number of locations in our commercial
location network, including those previously operated by Target Media; and (2) increased rental
payments for the renewal of display placement agreements in the more desirable locations on
our commercial location network offset in part by lower rental payments paid for new locations
in our commercial location network because of a further reduction in the number of available
desirable locations that command more expensive rental fees. Flat-panel display depreciation
costs increased from $3.4 million in 2005 to $9.2 million in 2006, as a result of an increase in
the number of flat-panel displays we own and operate directly from 45,049 as of December 31,
2005 to 80,623 as of December 31, 2006 and to our acquisition of Target Media Group and 3
regional distributors during this period. Other cost of revenues related to net advertising service
cost increased from $3.2 million in 2005 to $6.1 million in 2006 as a result of (1) increase in
number of personnel responsible for monitoring the network following the acquisition of Target
Media; (2) an increase in the volume of CF cards we purchased even as the per-unit cost of CF
cards decreased and (3) an increase in salary and benefit expenses for personnel responsible for
location relations and display placement agreements with landlords and property managers and
for maintaining and monitoring our network.
• Net advertising service cost — in-store network. We began incurring net advertising service cost
relating to our in-store network in April 2005 when we launched our in-store network. We incurred
$18.1 million in net advertising service cost for our in-store network in 2006, consisting of location
costs of $12.7 million and depreciation costs relating to the installation and maintenance of our in-
store network amounting to $3.5 million.
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• Other cost. We incurred net advertising equipment costs of $975,747 in 2005 compared to
$764,959 in 2006, which decrease reflects the fact that we have acquired many of our fastest-
growing regional distributors. We expect net advertising equipment costs to continue to decrease.
GrossProfit. As a result of the foregoing, our gross profit increased from $41.5 million in 2005 to
$130.5 million in 2006 and our overall gross margin increased during the same period from 60.8% to
61.6%. The increase in our gross margin was due to a combination of the continuous increase in the
sell-out rate and cost optimization.
OperatingExpenses. Our operating expenses increased significantly from $18.7 million in 2005
to $50.1 million in 2006. This increase was primarily due to increases in our selling and marketing
expenses and in our general and administrative expenses associated with the growth of our business.
• General and Administrative. General and administrative expenses increased substantially
from $9.1 million in 2005 to $25.7 million in 2006 mainly due to an increase in the size of our
administrative staff and corresponding increases in expenses for salary and benefits as well as
accounting and administrative costs related to being a public company. In addition, in connection
with the options granted to our directors, employees and consultants since July 2004, we
recorded stock-based compensation of $6.1 million in 2006 following the adoption of SFAS No.
123 (revised 2005), “Share-Based Payment”.
• Selling and Marketing. Selling and marketing expenses increased substantially from $9.6 million
in 2005 to $25.8 million in 2006 due to increases in marketing and promotional expenses by our
sales force and in salary and benefits associated with the expansion of our sales force.
IncomefromOperations. As a result of the foregoing, we had income from operations of $22.8
million in 2005 compared to $80.4 million in 2006.
IncomeBeforeIncomeTaxesandMinorityInterest. Income before income taxes and minority
interest was $24.4 million in 2005 compared to $84.3 million in 2006.
• Interest Income, net. Interest income, net of interest expenses increased from 1.8 million in 2005
to $4.3 million in 2006. This interest income was the result of a significant increase in our cash
and cash equivalents balances resulting from cash payments collected from our advertising
operations and proceeds from our follow-on offerings.
• Other Expense, net. We recorded net other expense of $161,148 in 2005 compared to other
income of $287,539, in 2006.
• Income Taxes. Our income taxes were $694,453 in 2005 compared to $1,043,538 in 2006.
• Minority Interests. We had minority interests expense of $144,433 and $104,773 in 2005 and
2006, respectively, in connection with the pro rata income attributable to minority shareholders of
our subsidiaries.
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Management’s Discussion and Analysis
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NetIncome. As a result of the foregoing, we recorded net income of $83.2 million in 2006 compared
to net income of $23.5 million in 2005.
YearEndedDecember31,2005ComparedtoYearEndedDecember31,2004
TotalRevenues. Our total revenues increased substantially from $29.2 million in 2004 to $68.2 million
in 2005 due to an increase in our advertising service revenue which was partially offset by a decrease in
advertising equipment revenue.
Our total advertising service revenue increased significantly from $26.3 million in 2004 to $66.9 million in
2005.
Commercial location network. Advertising service revenue from our commercial location network
increased significantly from $26.3 million in 2004 to $61.4 million, including $7.2 million to related parties
in 2005. The increase in advertising service revenue for our commercial location network is attributable
to:
• an increase in the number of 30-second-equivalent advertising time slots we sold on our
commercial location network from 4,723 in 2004 to 13,943 in 2005 and partially offset by a
decrease in the average selling price per time slot sold from $5,573 in 2004 to $4,461 in 2005.
Total network capacity, measured by number of available time slots, also increased from 5,170
as of December 31, 2004 to 9,028 as of December 31, 2005. The increase in the number of
30-second-equivalent advertising time slots sold between these two periods is due primarily to
the following factors:
• Our network reach increased from 34 cities as of December 31, 2004, including 11 cities directly
operated by our company and 23 cities operated by our regional distributors, to 58 cities as of
December 31, 2005, including 26 cities directly operated by our company and 32 cities operated
by our regional distributors;
• We gained an additional seven minutes of advertising cycle time from each of our regional
distributors after we acquired them between January 1, 2005 and December 31, 2005; and
• On July 1, 2005, we extended the cycle time in our directly operated Tier II cities from nine
minutes to twelve minutes.
• The increase in the number of 30-second-equivalent advertising time slots sold on our commercial
location network was also attributable to increased acceptance of our network among our
advertising clients, which we believe is primarily due to the increased coverage and effectiveness
of our network that grew from 15,415 flat-panel displays as of December 31, 2004 to 48,226
displays as of December 31, 2005, including our regional distributors.
• The decrease in the average selling price was largely due to growth in sales of time slots with
lower selling prices in our Tier II cities, while the average selling price of our advertising services in
our Tier I cities increased between these two periods.
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Management’s Discussion and Analysis
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In-store network. Advertising service revenue from our in-store network, which commenced operations
in April 2005, totaled $5.5 million in 2005. We expect the contribution to our total revenues from our in-
store network to increase in the near future.
Our advertising equipment revenue decreased from $2.9 million in 2004 to $1.3 million in 2005. This
decrease was primarily attributable to our acquisition of a number of our regional distributors during
2004 and 2005 because, following each acquisition, we no longer sell flat-panel displays to each former
regional distributor. This decrease was also partially attributable to decreased sales to our existing
regional distributors, as the initial installation of the network in their respective cities of operation was
largely completed in 2004 and the first quarter of 2005. We expect advertising equipment revenue to
remain stable or decrease over time as we continue to acquire our existing regional distributors and
as the most desirable cities for the establishment of similar networks by regional distributors become
saturated.
CostofRevenues. Our cost of revenues increased significantly from $8.7 million in 2004 to $26.7
million in 2005 due to increases in our net advertising service cost for our commercial location network
and our in-store network and in our net advertising equipment cost.
• Net advertising service cost — commercial location network. Our net advertising services cost for
our commercial location network increased substantially from $6.8 million in 2004 to $18.3 million
in 2005. This increase was due to the substantial increase in our advertising service business
on our commercial location network between these two periods. Our location costs increased
substantially from $4.6 million in 2004 to $11.3 million in 2005 due to a substantial increase in the
number of commercial locations where we entered into display placement agreements. Our rental
fees increased as a percentage of total revenues between these two periods as a result of (1) a
significant increase in the number of locations in our commercial location network (2) increased
rental payments for the renewal of display placement agreements in the more desirable locations
on our commercial location network offset in part by lower rental payments paid for new locations
in our commercial location network because of a further reduction in the number of available
desirable locations that command more expensive rental fees. Flat-panel display depreciation
costs increased from $774,375 in 2004 to $3.4 million in 2005, as a result of an increase in the
number of flat-panel displays we own and operate directly from 12,786 as of December 31, 2004
to 45,049 as of December 31, 2005 and to our acquisition of 14 regional distributors during this
period. Other cost of revenues related to net advertising service cost increased from $1.4 million in
2004 to $3.2 million in 2005 as a result of (1) an increase in the volume of CF cards we purchased
even as the per-unit cost of CF cards decreased and (2) an increase in salary and benefit
expenses for personnel responsible for location relations and display placement agreements with
landlords and property managers and for maintaining and monitoring our network.
• Net advertising service cost — in-store network. We began incurring net advertising service cost
relating to our in-store network in April 2005 when we launched our in-store network. We incurred
$7.4 million in net advertising service cost for our in-store network in 2005, consisting of location
costs and depreciation costs relating to the installation and maintenance of our in-store network.
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Management’s Discussion and Analysis
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• Net advertising equipment cost. We incurred net advertising equipment costs of $1.9 million in
2004 compared to $975,747 in 2005, which decrease reflects the fact that we have acquired
many of our fastest-growing regional distributors. We expect net advertising equipment costs to
continue to decrease.
GrossProfit. As a result of the foregoing, our gross profit increased from $20.5 million in 2004 to
$41.5 million in 2005 although our overall gross margin decreased during the same period from 70.0%
to 60.8%. The decrease in our gross margin was largely a result of increased rental payments, including
fixed initial payments, to stores and depreciation costs incurred as we launched our in-store network.
OperatingExpenses. Our operating expenses increased significantly from $7.5 million in 2004 to
$18.7 million in 2005. This increase was primarily due to increases in our business tax, our selling and
marketing expenses and in our general and administrative expenses associated with the growth of our
business, such as salaries and costs associated with preparing to become a publicly listed company.
• General and Administrative. General and administrative expenses increased substantially
from $4.0 million in 2004 to $9.1 million in 2005 mainly due to an increase in the size of our
administrative staff and corresponding increases in expenses for salary and benefits as well as
accounting and administrative costs relating to being a public company. In addition, in connection
with the options granted to our directors, employees and consultants since July 2004, we
recorded stock based compensation of $683,186 in 2005.
• Selling and Marketing. Selling and marketing expenses increased substantially from $3.5 million
in 2004 to $9.6 million in 2005 due to increases in marketing and promotional expenses by our
sales force, and in salary and benefits associated with the expansion of our sales force.
IncomefromOperations. As a result of the foregoing, we had income from operations of $13.0
million in 2004 compared to $22.8 million in 2005.
IncomeBeforeIncomeTaxesandMinorityInterest. Income before income taxes and minority
interest was $1.3 million in 2004 compared to $24.4 million in 2005, which included interest income and
other income (expenses) and change in fair value of series B convertible redeemable preferred shares in
2004.
• Interest Income, net. Interest income increased from $9,739 in 2004 to $1.8 million in 2005. This
interest income was the result of a significant increase in our cash and cash equivalents balances
resulting from cash payments collected from our advertising operations, sales of our preference
shares and proceeds from our initial public offering.
• Other Expense, net. We recorded net other expense of $3,843 in 2004 compared to other
expense of $161,148 in 2005.
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Management’s Discussion and Analysis
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• Change in Fair Value of Series B Convertible Redeemable Preferred Shares. We incurred a change
in fair value of series B convertible redeemable preferred shares of $11.7 million in 2004. Upon
the occurrence of our initial public offering in July 2005, all outstanding preference shares were
converted into ordinary shares, and accordingly we did not incur any change in fair value of series
B convertible redeemable preferred shares in 2005.
• Income Taxes. Our income taxes were $907,550 in 2004 compared to $694,453 in 2005, which
decrease resulted from the fact that in 2005, we derived most of our revenue from Focus Media
Advertising Agency, which had no tax liability during this period, whereas during 2004, we derived
most of our revenues from Focus Media Advertisement, which had tax liability.
• Minority Interest. We had minority interest expense of $13,516 and $144,433 in 2004 and 2005,
respectively, in connection with the pro rata income attributable to minority shareholders of four of
our subsidiaries.
NetIncome. As a result of the foregoing, we recorded net income of $23.5 million in 2005 compared
to net income of $372,752 in 2004.
C. LIQUIDITy aND CaPITaL reSOUrCeS
Liquidity and Capital resources
CashFlowsandWorkingCapital
To date, we have financed our operations primarily through cash generated from operating activities
and sales of equity in private and public transactions. As of December 31, 2006, we had approximately
$164.6 million in cash and cash equivalents. As we have expanded our network, entered into a large
number of display placement agreements, increased our acquisition of regional distributors and related
businesses, and made strategic acquisitions, our cash needs for such acquisitions, the purchase of
flat-panel displays, payment of our location and maintenance costs and employee costs increased
significantly and accounted for the net cash used in investing activities. Our cash and cash equivalents
primarily consist of cash on hand and liquid investments with original maturities of three months or less
that are deposited with banks and other financial institutions. We generally deposit our excess cash
in interest bearing bank accounts. Although we consolidate the results of Focus Media Advertisement
and its subsidiaries in our consolidated financial statements and we can utilize their cash and cash
equivalents in our operations through Focus Media Advertisement and its subsidiaries, we do not have
direct access to the cash and cash equivalents or future earnings of Focus Media Advertisement.
However, these cash balances can be utilized by us for our normal operations pursuant to our
agreements with Focus Media Advertisement and its subsidiaries that provide us with effective control
over Focus Media Advertisement and its subsidiaries. In addition, we have access to the cash flows of
Focus Media Advertisement and its subsidiaries through contractual arrangements with our subsidiaries
Focus Media Technology and Focus Media Digital, which provide technical and other services in
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exchange for fees. See “Item 7.B Major Shareholders and Related Party Transactions — Related Party
Transactions — Agreements Among Us, Focus Media Technology, Focus Media Digital, New Focus
Media Advertisement, Focus Media Advertisement and Its Subsidiaries”.
We expect to require cash in order to fund our ongoing business needs, particularly the location costs
connected with the placement of our television displays, to fund the ongoing expansion of our network
and for payments in connection with our acquisitions. Other possible cash needs may include the
upgrading of technology on our network as well as any payment of claims that could be made against
us. We have not encountered any difficulties in meeting our current cash needs.
The following table shows our cash flows with respect to operating activities, investing activities and
financing activities in 2004, 2005 and 2006:
For the year ended December 31,2004 2005 2006(in thousands of U.S. dollars)
Net cash provided by operating activities $ 4,045 $ 11,269 $ 93,355Net cash (used) in investing activities (11,070) (117,667) (121,994)Net cash provided by financing activities 28,978 119,169 153,521Net increase in cash and cash equivalent 21,953 13,984 127,958
We had cash provided by operating activities of $93.4 million in 2006. This was primarily attributable
to net income generated from the operation of our advertising network, adjusted up $7.9 million, $3.1
million and $1.3 million to reflect prepaid expenses and other current assets, rental deposits and income
taxes payable, respectively, and adjusted down by $22.3 million, 4.7 million, $3.2 million and $1.7
million to reflect accounts receivable, amounts due from related parties accounts payable, and accrued
expenses and other current liabilities respectively. We had cash provided by operating activities of
$11.3 million in 2005. This was primarily attributable to net income generated from the operation of our
advertising network, adjusted up, $5.0 million, $672,585 and $4.0 million to reflect accounts payable,
income taxes payable and accrued expenses and other current liabilities, respectively, and adjusted
down $380,174, $14.7 million and $2.3 million to reflect amounts due from related parties, accounts
receivable and prepaid expenses and other current assets, respectively. We had net cash provided
by operating activities of $4.0 million in 2004. This was primarily attributable to our net income from
operation of our network, adjusted down $4.5 million, $2.5 million, $1.6 million and $1.7 million to reflect
our accounts receivable from our advertising clients and regional distributors, a decrease in amounts
due from related parties, accounts payable from location and maintenance costs owed to third parties
and prepaid expenses and other current assets including location costs, respectively, and adjusted up
$11.7 million, $4.2 million and $0.8 million to reflect the change in fair value of derivative liability, accrued
expenses from location costs and maintenance costs and other current liabilities and income taxes
payable, respectively.
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Management’s Discussion and Analysis
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We had net cash used in investing activities of $122.0 million in 2006, primarily in connection with
the acquisition of companies, including Target Media and Focus Media Wireless, subsidiaries and
regional distributors, purchase of equipment used to expand our networks, and rental deposits paid
for locations on our out-of-home television, poster frame and outdoor LED networks. Our acquisition
of Framedia involved our payment of $39.6 million in cash and issuance of $55.4 million of our
ordinary shares to the seller parties at a fixed value of $2.456 per ordinary share. In addition, subject
to Framedia’s attainment of certain financial performance goals in 2006, we may be obligated to issue
up to $88 million in additional Focus Media ordinary shares, at a fixed value of $2.456 per ordinary
share, to the selling parties in 2007. Pursuant to the share purchase agreement we entered into with
E-Times and Skyvantage, we paid the seller parties $5.0 million. We also paid $94 million in cash
and issued 77 million ordinary shares to the shareholders of Target Media. The issuance of such
additional ordinary shares will also result in lower earnings per share or per ADS when we calculate
our earnings for 2007 than would otherwise be the case were such additional shares not issued. See
“Item 10.C Additional Information — Material Contracts — Framedia” and “— Target Media”. We
had net cash used in investing activities of $117.7 million for in 2005, primarily in connection with the
acquisition of companies, subsidiaries and regional distributors, purchase of equipment used to expand
our commercial location and in-store networks, and rental deposits paid for locations on both our
commercial location and in-store networks. We had net cash used in investing activities of $11.1 million
in 2004. This was primarily attributable to our purchase of property and equipment for the operation
of our network, rental deposits made in connection with our display placement agreements and our
acquisition of eleven businesses, eight of which were our former regional distributors.
$153.5 million net cash was provided by financing activities in 2006, primarily from the proceeds of
$142.7 million, net of issuance costs, from our follow-on offerings. $119.2 million net cash was provided
by financing activities in 2005, primarily from the proceeds of our initial public offering in July 2005.
We had net cash provided by financing activities of $29.0 million in 2004. This was attributable to the
proceeds from the issuance of our Series B and Series C-2 convertible redeemable preference shares,
offset slightly by the repayment of a short-term loan from one of our shareholders.
We believe that our current cash and cash equivalents, cash flow from operations and the proceeds
from our recent public offering and follow-on offerings will be sufficient to meet our anticipated cash
needs, including for working capital and capital expenditures, for the foreseeable future. These
additional cash needs may include costs associated with the expansion of our network, such as the
purchase of flat-panel displays and LED digital billboards and increased location cost, including in
connection with our acquisition of Framedia, Target Media, E-Times and Focus Media Wireless, as well
as possible acquisitions of our regional distributors. We are also required under PRC law to set aside
10% of our after-tax profits into a general reserve fund. We expect that revenues from operation of our
advertising network and the proceeds from our offerings will be sufficient to cover any such obligations
and costs. We may, however, require additional cash resources due to changed business conditions
or other future developments. If these sources are insufficient to satisfy our cash requirements, we may
seek to sell debt securities or additional equity securities or obtain a credit facility. The sale of convertible
debt securities or additional equity securities could result in additional dilution to our shareholders.
The incurrence of indebtedness would result in debt service obligations and could result in operating
and financial covenants that would restrict our operations. We cannot assure you that financing will be
available in amounts or on terms acceptable to us, if at all.
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Management’s Discussion and Analysis
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From time to time, we evaluate possible investments, acquisitions or divestments and may, if a suitable
opportunity arises, make an investment or acquisition or conduct a divestment.
Transactions with related Parties
Our transactions with related parties have been conducted on arm’s length terms. See “Item 7. Major
Shareholders and Related Party Transactions—B. Related Party Transactions” and Note 18 to our
audited consolidated financial statements included in this annual report.
Capital expenditures
The following table sets forth our historical capital expenditures for the periods indicated. Actual future
capital expenditures may differ from the amounts indicated below.
For the year ended December 31,2004 2005 2006(in thousands of U.S. dollars)
Total capital expenditure $ 6,373 $ 36,765 $ 22,878
Our capital expenditures were made primarily to acquire flat-panel displays for our advertising network.
Our capital expenditures are primarily funded by net cash provided from operating activities. We expect
our capital expenditures in 2007, in an amount of approximately $20 million, to primarily consist of
purchases of components for our flat-panel displays and new poster frames as we continue to expand
our commercial location network, in-store network and poster frame network. We also intend to
upgrade our financial, accounting and internal control systems. As opportunities arise, we may make
additional acquisitions of regional distributors and other businesses that complement our operations.
We believe that we will be able to fund these upgrades and equipment purchases through the revenues
we generate, and do not anticipate that these obligations will have a material impact on our liquidity
needs.
restricted Net assets
Relevant PRC laws and regulations permit payments of dividends by our PRC subsidiaries only out
of their retained earnings, if any, as determined in accordance with PRC accounting standards and
regulations. In addition, PRC laws and regulations require that annual appropriations of 10% of after-
tax income for our general reserve fund should be set aside prior to payment of dividends. As a
result of these PRC laws and regulations, our PRC subsidiaries and our affiliated PRC entities are
restricted in their ability to transfer a portion of their net assets to us whether in the form of dividends,
loans or advances. As of December 31, 2005 and 2006, the amount of our restricted net assets was
approximately $75.9 million and $223.4 million, respectively.
4�
Management’s Discussion and Analysis
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e. TreND INFOrMaTION
Please refer to “—Overview” for a discussion of the most significant recent trends in our production,
sales, costs and selling prices. In addition, please refer to discussions included in this Item for a
discussion of known trends, uncertainties, demands, commitments or events that we believe are
reasonably likely to have a material effect on our net operating revenues, income from continuing
operations, profitability, liquidity or capital resources, or that would cause reported financial information
not necessarily to be indicative of future operating results or financial condition.
F. OFF-BaLaNCe SHeeT arraNGeMeNTS
We have not entered into any financial guarantees or other commitments to guarantee the payment
obligations of any third parties. In addition, we have not entered into any derivative contracts that
are indexed to our own shares and classified as shareholder’s equity, or that are not reflected in our
consolidated financial statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to
such entity. Moreover, we do not have any variable interest in any unconsolidated entity that provides
financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and
development services with us.
G. TaBULar DISCLOSUre OF CONTraCTUaL OBLIGaTIONS
The following table sets forth our contractual obligations and commitments with definitive payment
terms on a consolidated basis which will require significant cash outlays in the future as of December
31, 2006.
Payments due December 31TOTaL 2007 2008 2009 2010 Thereafter
Display and poster frame
placement agreement
obligations $ 107,242 $ 46,186 $ 31,363 $ 19,098 $ 8,683 $ 1,912Office premise lease
obligations 4,198 1,971 1,153 773 251 50
Total contractual obligations $ 111,440 $ 48,157 $ 32,516 $ 19,871 $ 8,934 $ 1,962
Other than certain leasing arrangements relating to the placement of our flat-panel and office premises,
as of December 31, 2006, we did not have any long-term debt obligations, operating lease obligations
or purchase obligations.
4�
Management’s Discussion and Analysis
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As of December 31, 2006, we had no other indebtedness, material contingent liabilities, or material
mortgages or liens. We intend to meet our future funding needs primarily through net cash provided
from operating activities and the proceeds of this offering. Our objective is to maintain the safety and
liquidity of our cash. Therefore we intend to keep our cash and cash equivalents in short-term bank
deposits and short-term bonds.
Interest rate risk
Our exposure to interest rate risk primarily relates to the interest income generated by excess cash,
which is mostly held in interest-bearing bank deposits. We have not used derivative financial instruments
in our investment portfolio. Interest earning instruments carry a degree of interest rate risk. We have not
been exposed nor do we anticipate being exposed to material risks due to changes in market interest
rates. However, our future interest income may fall short of expectations due to changes in market
interest rates.
Foreign Currency risk
Substantially all our revenues and expenses are denominated in Renminbi. We have not had any
material foreign exchange gains or losses. Although in general, our exposure to foreign exchange risks
should be limited, the value of your investment in our ADSs will be affected by the foreign exchange
rate between U.S. dollars relative to the Renminbi because the value of our business is effectively
denominated in Renminbi, while the ADSs will be traded in U.S. dollars. Furthermore, a decline in the
value of the Renminbi could reduce the U.S. dollar equivalent of the value of the earnings from, and our
investments in, our subsidiaries and PRC-incorporated affiliates in China. In addition, appreciation or
depreciation in the value of the Renminbi relative to the U.S. dollar would affect our reported financial
results in U.S. dollar terms. See “Item 3.B. — Risk Factors — Risks Relating to the People’s Republic of
China — Fluctuations in exchange rates could result in foreign currency exchange losses”.
Inflation
In recent years, China has not experienced significant inflation, and thus inflation has not had a
significant effect on our business historically. According to the National Bureau of Statistics of China, the
change in the Consumer Price Index in China was (0.8)%, 1.2%, 3.9% ,1.8% and 1.5% in 2002, 2003,
2004, 2005 and 2006, respectively.
44
Report of Independent Registered Public Accounting Firm
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TO THe BOarD OF DIreCTOrS aND SHareHOLDerS OF FOCUS MeDIa HOLDING LIMITeD
We have audited the accompanying consolidated balance sheets of Focus Media Holding Limited and
subsidiaries (the “Group”) as of December 31, 2004, 2005 and 2006 and the related consolidated statements
of operations, shareholders’ equity (deficiency) and comprehensive income, and cash flows for each of the
three years in the period ended December 3 I, 2004, 2005 and 2006, and the related financial statement
schedule included in Schedule 1. We also have audited management’s assessment, included in the
accompanying Report by Management on Internal Control over Financial Reporting, that the Group maintained
effective internal control over financial reporting as of December 31, 2006, based on criteria established in
Internal Control -Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. As described in the Report by Management on Internal Control over Financial Reporting,
management excluded from its assessment the internal control over financial reporting at Infoachieve Limited,
Dotad Holdings Limited, DongGuan Advertisement & Communications Co., Ltd., Appreciate Capital Ltd.,
Bestwin Partners Limited and Glomedia Holdings Limited, which were acquired on January 1, March 20, April
8, September 1, October 1 and December 1, 2006, respectively, and whose aggregated financial statements
constitute 4.6 percent and 4.0 percent of net and total assets, respectively, 25.2 percent of revenues, and
31.4 percent of net income of the consolidated financial statement amounts as of and for the year ended
December 31, 2006. Accordingly, our audit did not include the internal control over financial reporting at
Infoachieve Limited, Dotad Holdings Limited, DongGuan Advertisement & Communications Co., Ltd.,
Appreciate Capital Ltd., Bestwin Partners Limited or Glomedia Holdings Limited. The Group’s management is
responsible for these financial statements and financial statement schedule, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on these financial statements and financial statement
schedule, an opinion on management’s assessment, and an opinion on the effectiveness of the Group’s
internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material respects. Our audit of financial statements
included examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, evaluating management’s
assessment, testing and evaluating the design and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
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Report of Independent Registered Public Accounting Firm
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A company’s internal control over financial reporting is a process designed by, or under the supervision of,
the company’s principal executive and principal financial officers, or persons performing similar functions,
and effected by the company’s board of directors, management, and other personnel to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles and that receipts and
expenditures of the company are being made only in accordance with the authorization of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements due to error or fraud may
not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of
the internal control over financial reporting to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of the Group as of December 31, 2004, 2005 and 2006, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2004, 2005 and
2006, in conformity with accounting principles generally accepted in the United States of America, Also, in
our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the information set forth therein. Also in
our opinion, management’s assessment that the Group maintained effective internal control over financial
reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
As discussed in Note 2(s) to the consolidated financial statements, effective January 1, 2006, the Group
changed its method of accounting for share-based payments to conform to Statement of Financial Accounting
Standards No.123R “Share-based Payment”.
Furthermore, in our opinion, the Group maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2006, based on the criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Deloitte Touche Tohmatsu CPa Ltd.
Shanghai, China
September 25, 2007
4�
Consolidated Balance Sheets
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December 31,2004 2005 2006(In U.S. dollars, except share data)
assetsCurrent assets:
Cash and cash equivalents $ 22,669,106 $ 36,653,180 $ 164,610,942Investment in debt securities — 34,835,850 —Accounts receivable, net of allowance for
doubtful accounts of $173,837, $396,657
and $1,308,554 in 2004, 2005 and 2006,
respectively 6,619,949 21,188,531 61,614,343Inventories 1,243,140 479,529 519,095Prepaid expenses and other current assets 1,746,996 4,444,303 5,199,355Deposits paid for acquisition of subsidiaries 362,472 40,919,530 3,526,370Amounts due from related parties 2,740,032 3,120,206 7,852,789
Total current assets 35,381,695 141,641,129 243,322,894
Rental deposits 1,606,378 11,819,095 11,833,290Equipment, net 9,197,143 43,694,888 70,249,324Acquired intangible assets, net 708,306 1,157,920 34,717,019Goodwill 9,058,086 13,298,072 739,743,871Other long-term assets 463,051 742,914 6,375,682
Total assets $ 56,414,659 $ 212,354,018 $ 1,106,242,080
Liabilities, mezzanine equity and
shareholders’ equity (deficiency)Current liabilities:
Short-term loans $ — $ 991,301 $ 2,769,459Accounts payable 607,091 5,847,530 5,987,593Accrued expenses and other current liabilities 6,591,435 11,746,902 38,674,175Income taxes payable 1,435,486 2,108,071 4,060,170Amounts due to related parties — — 345,768
Total current liabilities 8,634,012 20,693,804 51,837,165
Deferred tax liabilities — — 3,303,110
Total liabilities $ 8,634,012 $ 20,693,804 $ 55,140,275
Commitments (Note 16)Minority interest 80,692 245,563 357,814
4�
Consolidated Balance Sheets
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December 31,2004 2005 2006(In U.S. dollars, except share data)
Mezzanine equitySeries A convertible redeemable preference
shares ($0.00005 par value; 41,967,400
shares authorized and 41,967,400, nil and nil
shares issued and outstanding in 2004, 2005
and 2006, respectively) 6,295,110 — —Series B convertible redeemable preference
shares ($0.00005 par value; 48,191,600
shares authorized and 48,191,600, nil and nil
shares issued and outstanding in 2004, 2005
and 2006, respectively) 12,062,696 — —Series C-1 convertible redeemable preference
shares ($0.00005 par value; 34,054,000
shares authorized and 34,054,000, nil and nil
shares issued and outstanding in 2004, 2005
and 2006, respectively) 17,500,350 — —Series C-2 convertible redeemable preference
shares ($0.00005 par value; 34,053,400
shares authorized and 34,053,400, nil and nil
shares issued and outstanding in 2004, 2005
and 2006, respectively) 17,415,000 — —
Shareholders’ equity (deficiency)Ordinary shares ($0.00005 par value;
885,516,600, 19,800,000,000 and
19,800,000,000 shares authorized in 2004,
2005 and 2006; 142,464,600, 378,306,000
and 534,896,873 shares issued and
outstanding in 2004, 2005 and 2006,
respectively) 7,124 18,916 26,745Additional paid-in capital 5,981,154 177,419,761 709,196,246Acquisition consideration to be issued — — 237,879,480Deferred share-based compensation (969,959) (246,569) —Retained earnings (accumulated deficit) (10,550,414) 12,997,237 96,194,969Accumulated other comprehensive income
(loss) (41,106) 1,225,306 7,446,551
Total shareholders’ equity (deficiency) $ (5,573,201) $ 191,414,651 $ 1,050,743,991
Total liabilities, mezzanine equity and
shareholders’ equity (deficiency) $ 56,414,659 $ 212,354,018 $ 1,106,242,080
The accompanying notes are an integral part of these consolidated financial statements.
4�
Consolidated Statements of Operations
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For the years ended December 31,2004 2005 2006
(In U.S. dollars, except share data)
Net revenues:Advertising Service Revenue $ 26,321,179 $ 66,903,679 $ 209,973,935Other Revenue 2,888,720 1,325,234 1,931,530
Total net revenues 29,209,899 68,228,913 211,905,465
Cost of revenues:Advertising Service Cost 6,804,410 25,748,318 80,615,408Other Cost 1,934,331 975,747 764,959
Total cost of revenues 8,738,741 26,724,065 81,380,367
Gross profit 20,471,158 41,504,848 130,525,098
Operating expenses/(income):General and administrative 3,987,496 9,119,846 25,723,413Selling and marketing 3,472,088 9,599,226 25,761,948Other operating income — — (1,338,334)Goodwill impairment loss 58,397 — —
Total operating expenses/(income) 7,517,981 18,719,072 50,147,027
Income from operations 12,953,177 22,785,776 80,378,071Interest income 9,739 1,811,782 4,560,798Interest expense — (49,873) (305,287)Other income 53,940 70,471 271,451Other expense (57,783) (231,619) (558,990)Change in fair value of derivative liability associated with
Series B convertible redeemable preference shares (11,692,287) — —
Income before income taxes and minority interest 1,266,786 24,386,537 84,346,043Income taxes 907,550 694,453 1,043,538
Net income after income taxes before minority
interest 359,236 23,692,084 83,302,505Minority interest 13,516 (144,433) (104,773)
4�
Consolidated Statements of Operations
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For the years ended December 31,2004 2005 2006
(In U.S. dollars, except share data)
Net income 372,752 23,547,651 83,197,732Deemed dividend on Series A convertible redeemable
preference shares (8,308,411) — —Deemed dividend on Series B convertible redeemable
preference shares (2,191,442) — —Deemed dividend on Series C-1 convertible redeemable
preference shares (13,356,087) — —Premium of Series B convertible redeemable preference
shares 12,906,774 — —
Net income (loss) attributable to holders of
ordinary shares $ (10,576,414) $ 23,547,651 $ 83,197,732
Income (loss) per share — basic $ (0.07) $ 0.09 $ 0.16
Income (loss) per share — diluted $ (0.07) $ 0.06 $ 0.16
Shares used in calculating basic income (loss) per share 160,998,600 252,128,545 505,411,079
Shares used in calculating diluted income (loss) per
share 160,998,600 365,938,094 521,536,381
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statements of Shareholders’ Equity (Deficiency) and Comprehensive Income
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Ordinary
additional
paid-in
capital
Deferred
share based
compensation
retained
earnings
(accumulated
deficit)
accumulated
other
comprehensive
income (loss)
Total
shareholders’
equity (deficiency)
Comprehensive
incomeShares amount
(In U.S. dollars, except share data)
Balance at January 1, 2004 200,000,000 $ 10,000 $ 1,188,817 $ — $ 26,000 $ (41,755) $ 1,183,062 —
Issuance of ordinary shares 14,594,200 730 4,484,068 — — — 4,484,798 —
Reclassification of ordinary shares to
Series A convertible redeemable
preference shares (62,400,000) (3,120) (1,048,469) — — — (1,051,589) —
Reclassification of ordinary shares to
Series C-1 convertible redeemable
preference shares (9,729,600) (486) (101,932) — — — (102,418) —
Deferred share-based compensation — — 1,334,835 (1,334,835) — — — —
Share-based compensation expense — — 123,835 364,876 — — 488,711 —
Deemed dividend on Series A convertible
redeemable preference shares — — — — (8,308,411) — (8,308,411) —
Deemed dividend on Series B convertible
redeemable preference shares — — — — (2,191,442) — (2,191,442) —
Deemed dividend on Series C-1
convertible redeemable preference
shares — — — — (13,356,087) — (13,356,087) —
Premium of Series B convertible
redeemable preference shares — — — — 12,906,774 — 12,906,774 —
Cumulative translation adjustment — — — — — 649 649 649
Net income — — — — 372,752 — 372,752 372,752
Balance at December 31, 2004 142,464,600 $ 7,124 $ 5,981,154 $ (969,959) $ (10,550,414) $ (41,106) $ (5,573,201) $ 373,401
Series A convertible redeemable
preference shares converted into
ordinary shares upon initial public
offering 41,967,400 2,098 6,293,012 — — — 6,295,110 —
Series B convertible redeemable
preference shares converted into
ordinary shares upon initial public
offering 48,191,600 2,409 12,060,287 — — — 12,062,696 —
Series C-1 convertible redeemable
preference shares converted into
ordinary shares upon initial public
offering 34,054,000 1,703 17,498,647 — — — 17,500,350 —
Series C-2 convertible redeemable
preference shares converted into
ordinary shares upon initial public
offering 34,053,400 1,703 17,413,297 — — — 17,415,000 —
Issuance of ordinary shares upon initial
public offering, net of issuance cost of
$13,703,370 77,575,000 3,879 118,170,251 — — — 118,174,130 —
Deferred share-based compensation — — (264,751) 264,751 — — — —
Share-based compensation expense — — 267,864 458,639 — — 726,503 —
Unrealized loss on debt securities — — — — — (164,150) (164,150) (164,150)
Cumulative translation adjustments — — — — — 1,430,562 1,430,562 1,430,562
Net income — — — — 23,547,651 — 23,547,651 23,547,651
Balance at December 31, 2005 378,306,000 $ 18,916 $ 177,419,761 $ (246,569) $ 12,997,237 $ 1,225,306 $ 191,414,651 $ 24,814,063
�1
Consolidated Statements of Shareholders’ Equity (Deficiency) and Comprehensive Income
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Ordinary
additional
paid-in
capital
Deferred
share based
compensation
retained
earnings
(accumulated
deficit)
accumulated
other
comprehensive
income (loss)
Total
shareholders’
equity (deficiency)
Comprehensive
incomeShares amount
(In U.S. dollars, except share data)
Balance at December 31, 2005 378,306,000 $ 18,916 $ 177,419,761 $ (246,569) $ 12,997,237 $ 1,225,306 $ 191,414,651 —
Issuance of ordinary shares upon follow-
on offering on January 27, 2007, net
of issuance cost of $3,466,700 15,000,000 750 61,782,550 — — — 61,783,300 —
Issuance of ordinary shares upon follow-
on offering on June 16, 2006, net of
issuance cost of $2,740,407 16,000,000 800 80,966,793 — — — 80,967,593 —
Issuance of ordinary shares in connection
with acquisitions 99,254,193 4,962 365,660,061 — — — 365,665,023 —
Issuance of ordinary shares pursuant to
share option plans 26,336,680 1,317 15,246,244 — — — 15,247,561 —
Ordinary shares to be issued in
connection with acquisitions — — 237,879,480 — — — 237,879,480 —
Adjustment for the adoption of
SFAS 123R — — (246,569) 246,569 — — — —
Share-based compensation expense — — 8,367,406 — — — 8,367,406 —
Unrealized gain on debt securities — — — — — 164,150 164,150 164,150
Cumulative translation adjustments — — — — — 6,057,095 6,057,095 6,057,095
Net income — — — — 83,197,732 — 83,197,732 83,197,732
Balance at December 31, 2006 534,896,873 $ 26,745 $ 947,075,726 $ — $ 96,194,969 $ 7,446,551 $ 1,050,743,991 $ 89,418,977
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statements of Cash Flows
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For the year ended December 312004 2005 2006
(In U.S. dollars)
Operating activities:Income (loss) attributable to holders of
ordinary shares $ (10,576,414) $ 23,547,651 $ 83,197,732Deemed dividend on Series A convertible redeemable
preference shares 8,308,411 — —Deemed dividend on Series B convertible redeemable
preference shares 2,191,442 — —Deemed dividend on Series C-1 convertible
redeemable preference shares 13,356,087 — —Premium relating to Series B convertible redeemable
preference shares (12,906,774) — —
Net income 372,752 23,547,651 83,197,732Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Minority interest (13,516) 144,433 104,773Bad debt provision 173,837 235,604 1,844,605Share-based compensation 488,711 726,503 8,367,406Depreciation and amortization 923,163 4,927,016 19,511,552Loss on disposal of equipment 22,470 — —Change in fair value of derivative liability associated
with Series B convertible redeemable preference
shares 11,692,287 — —Goodwill impairment 58,397 — —
Changes in assets and liabilities, net of effects of
acquisitions:Accounts receivable, net (4,525,148) (14,710,176) (22,289,344)Inventories (1,030,529) (408,223) 23,334Prepaid expenses and other current assets (1,740,427) (2,347,426) 7,857,172Amounts due from related parties (2,487,456) (380,174) (4,732,583)Rental deposits (1,035,474) (10,076,230) 3,104,667Accounts payable (1,609,816) 5,007,564 (3,174,405)Accrued expenses and other current liabilities 4,174,214 3,950,903 (1,673,496)Amounts due to related parties (2,322,276) — —Income tax payable 825,100 672,585 1,276,252Deferred taxes assets 78,586 (20,664) (63,383)
Net cash provided by operating activities $ 4,044,875 $ 11,269,366 $ 93,354,282
��
Consolidated Statements of Cash Flows
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For the year ended December 312004 2005 2006
(In U.S. dollars)
Investing activities:Purchase of equipment and other long-term assets $ (6,373,124) $ (36,765,294) $ (22,878,254)Acquisition of intangible assets — — (6,403,114)Purchase of subsidiaries, net of cash acquired (4,697,378) (4,982,523) (124,062,515)Deposit paid to acquire subsidiaries — (40,919,530) (3,710,369)Disposal of an equity investment — — 60,005Expiration (investment) in debt securities — (35,000,000) 35,000,000
Net cash used in investing activities $ (11,070,502) $ (117,667,347) $ (121,994,247)
Financing activities:Repayment of short-term loan from a shareholder (500,000) — —Proceeds from issuance of ordinary shares, net of
issuance costs of $nil in 2004, $13,703,370 in
2005 and $6,207,107 in 2006 — 118,174,130 142,750,893Proceeds from issuance of ordinary shares pursuant
to share option plans — — 15,247,561Proceeds from issuance of Series B convertible
redeemable preference shares (net of issuance
costs of $437,304) 12,062,696 — —Proceeds from issuance of Series C-2 convertible
redeemable preference shares (net of issuance
costs of $85,000) 17,415,000 — —Proceeds from short-term loans — 991,301 24,598,037Repayment of short-term loans — — (29,402,066)Capital injection from minority shareholders — 3,089 326,307
Net cash provided by financing activities $ 28,977,696 $ 119,168,520 $ 153,520,732
Effect of exchange rate changes $ 649 $ 1,213,535 $ 3,076,995
Net increase in cash and cash equivalents $ 21,952,718 $ 13,984,074 $ 127,957,762Cash and cash equivalents, beginning of year 716,388 22,669,106 36,653,180
Cash and cash equivalents, end of year $ 22,669,106 $ 36,653,180 $ 164,610,942
Supplemental disclosure of cash flow informationIncome taxes paid $ 738 $ 94,391 $ 153,526
Interest paid $ — $ 11,581 $ 244,702
�4
Consolidated Statements of Cash Flows
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For the year ended December 312004 2005 2006
(In U.S. dollars)
SUPPLeMeNTaL DISCLOSUreS OF NON-CaSH
INveSTING aND FINaNCING aCTIvITIeSNon-cash investing activities:Acquisition of subsidiaries:
Value of ordinary shares issued $ 4,484,798 $ — $ 365,665,023
Ordinary share consideration to be issued $ — $ — $ 237,879,480
Accounts payable $ 538,860 $ 99,130 $ 4,530,745
Non-cash financing activities:Reclassification of ordinary shares to Series A
convertible redeemable preference shares $ 9,360,000 $ — $ —
Reclassification of Series A convertible redeemable
preference shares to Series C-1 convertible
redeemable preference share $ 3,064,890 $ — $ —
Reclassification of Series B convertible redeemable
preference shares to Series C-1 convertible
redeemable preference share $ 976,955 $ — $ —
The accompanying notes are an integral part of these consolidated financial statements.
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Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006
(In U.S. dollars except share data and unless otherwise stated)
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1. OrGaNIzaTION aND PrINCIPaL aCTIvITIeS
Focus Media Holding Limited and all of its subsidiaries (collectively referred to as the “Group”) are mainly
engaged in selling out-of home television advertising time slots on its network of flat-panel television
advertising displays located in high traffic areas such as commercial locations and in-store network.
Starting from 2006, the Group also engaged in providing advertising services on in-elevator poster
frames network and mobile handset advertising network.
PRC regulations currently limit foreign ownership of companies that provide advertising services,
including out-of-home television advertising services. To comply with these regulations, the Group
conducts substantially all of its activities through Focus Media Advertisement Co., Ltd. (“Focus Media
Advertisement”) and its subsidiaries, a variable interest entity which was renamed from Aiqi, and was
established in Shanghai China on September 2, 1997. On April 11, 2004, the majority shareholder of
Focus Media Advertisement, Jason Nanchun Jiang, incorporated Focus Media Holding Limited (“Focus
Media Holding” or the “Company”) with the same shareholders of Focus Media Advertisement. Focus
Media Advertisement entered into various agreements with 100% owned subsidiaries of Focus Media
Holding, i.e. Focus Media Technology (Shanghai) Co., Ltd. (“Focus Media Technology”) and Focus
Media Digital Information Technology (Shanghai) Co., Ltd. (“Focus Media Digital”), including a transfer of
trademarks and exclusive services agreement. Under these agreements, Focus Media Advertisement
has the right to use the trade name of Focus Media Technology, and Focus Media Digital, provides
technical and consulting services to Focus Media Advertisement and its subsidiaries. In return, Focus
Media Advertisement and its subsidiaries are required to pay Focus Media Technology services fees for
the use of trade name and Focus Media Digital for the technical and consulting services it receives. The
technical and consulting service fees are adjusted at the Focus Media Digital’s sole discretion. Focus
Media Digital is entitled to receive service fees in an amount up to all of the net income of Focus Media
Advertising.
In addition, Focus Media Holding, through Focus Media Technology, has been assigned all voting rights
by the direct and indirect owners of Focus Media Advertisement through an agreement valid indefinitely
that cannot be amended or terminated except by written consent of all parties. Finally Focus Media
Holding, through Focus Media Technology has the option to acquire the equity interests of Focus Media
Advertisement and its subsidiaries for a purchase price equal to the respective registered capital of
Focus Media Advertisement and its subsidiaries or a proportionate amount thereof, or such higher price
as required under PRC laws at the time of such purchase. Each of the shareholders of Focus Media
Advertisement has agreed to pay Focus Media Holding, any excess of the purchase price paid for such
equity interests in, or assets of, Focus Media Advertisement or its subsidiaries over the registered capital
of Focus Media Advertisement or its subsidiaries in the event that such option is exercised.
��
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006 (In U.S. dollars except share data and unless otherwise stated)
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1. OrGaNIzaTION aND PrINCIPaL aCTIvITIeS (continued)
Through contractual arrangements described above, Focus Media Holding is deemed the primary
beneficiary of Focus Media Advertisement resulting in Focus Media Advertisement being deemed
a subsidiary of Focus Media Holding under the requirements of FIN 46 (Revised), “Consolidation of
Variable Interest Entities” (“FIN 46(R)”). In substance, an existing company, Focus Media Advertisement,
has been reorganized as a subsidiary of the new company Focus Media Holding. Focus Media Holding
has the same controlling shareholder and the same non-controlling shareholders. Accordingly, the
Group’s financial statements reflect the financial statements of Focus Media Advertisement through May
2003 and, thereafter, the consolidated financial statements of Focus Media Holding and its subsidiaries,
which include Focus Media Advertisement and its subsidiaries.
As of December 31, 2006, the major subsidiaries of Focus Media Holding and Focus Media
Advertisement’s subsidiaries include the Appendix 1 attached.
2. SUMMary OF SIGNIFICaNT aCCOUNTING POLICIeS
(a) Basis of Presentation
The consolidated financial statements of the Group have been prepared in accordance with
accounting principles generally accepted in the United States of America (“US GAAP”).
(b) Basis of Consolidation
The consolidated financial statements include the financial statements of Focus Media Holding,
its majority-owned subsidiaries and its variable interest entity, Focus Media Advertisement and its
majority-owned subsidiaries. All inter-company transactions and balances have been eliminated
upon consolidation.
(c) Cash and Cash equivalents
Cash and cash equivalents consist of cash on hand and highly liquid investments which are
unrestricted as to withdrawal or use, and which have maturities of 3 months or less when
purchased.
(d) Use of estimates
The preparation of financial statements in conformity with US GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities
and revenue and expenses in the financial statements and accompanying notes. Significant
accounting estimates reflected in the Group’s financial statements include allowance for doubtful
accounts, useful lives and impairment for long-lived assets and goodwill, the recognition and
measurement of current and deferred income tax assets, and the valuation and recognition of
share-based compensation. The actual results experienced by the Company may differ from
management’s estimates.
��
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006
(In U.S. dollars except share data and unless otherwise stated)
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2. SUMMary OF SIGNIFICaNT aCCOUNTING POLICIeS (continued)
(e) Significant risks and Uncertainties
The Group participates in a young and dynamic industry and believes that changes in any of
the following areas could have a material adverse effect on the Group’s future financial position,
results of operations or cash flows: the Group’s limited operating history, rapid growth associated
with newly acquired business; advances and trends in new technologies and industry standards;
share market performance and public interest in companies operating in China that are listed on
share market in the U.S.; competition from other competitors; regulatory or other PRC related
factors; risks associated with the Group’s ability to attract and retain employees necessary
to support its growth; risks associated with the Group’s growth strategies; and general risks
associated with the advertising industry.
(f) Investment in available-for-sale Debt Securities
The Group classifies all of its short-term investments as available-for-sale securities. Such short-
term investments consist primarily of debt instrument which are stated at fair market value, with
unrealized gains and losses recorded as accumulated other comprehensive income (loss).
(g) Inventory
Inventory is comprised of media display equipments and compact flash cards, which are held for
sale. Inventory is stated at the lower of cost or market value. Adjustments are recorded to write
down the cost of obsolete and excess inventory to the estimated market value based on historical
and forecast demand.
(h) equipment, Net
Equipment, net is carried at cost less accumulated depreciation and amortization. Depreciation
and amortization is calculated on a straight-line basis over the following estimated useful lives:
Media display equipment 5 years
Computers and office equipment 5 years
Vehicles 5 years
Leasehold Improvements lesser of the term of the lease or the estimated useful lives
of the assets
The Group assembles certain of the media display equipment. In addition to costs under
assembly contracts, external costs directly related to the assembly of such equipment, including
duty and tariff, equipment installation and shipping costs, are capitalized.
��
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006 (In U.S. dollars except share data and unless otherwise stated)
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2. SUMMary OF SIGNIFICaNT aCCOUNTING POLICIeS (continued)
(i) acquired intangible assets, net
Acquired intangible assets, which consist of operation and broadcasting rights, lease agreements,
customer bases, customer backlogs, trademarks, non-compete agreements, and acquired
technology are valued at cost less accumulated amortization. Amortization is calculated using the
straight-line method over their expected useful lives of 1 to 10 years.
(j) Impairment of Long-Lived assets
The Group evaluates its long-lived assets and finite-lived intangibles for impairment whenever
events or changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. When these events occur, the Group measures impairment by comparing the
carrying amount of the assets to the future undiscounted future cash flows expected to result
from the use of the assets and their eventual disposition. If the sum of the future undiscounted
cash flow is less than the carrying amount of the assets, the Group would recognize an
impairment loss equal to the excess of the carrying amount over the fair value of the assets.
(k) Goodwill
SFAS No. 142 “Goodwill and Other intangible Assets” requires the Group to complete a two-
step goodwill impairment test. The first step compares the fair value of each reporting unit to its
carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying
amount, goodwill is not considered to be impaired and the second step will not be required. If the
carrying amount of a reporting unit exceeds its fair value, the second step compares the implied
fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of
goodwill is determined in a manner similar to accounting for a business combination with the
allocation of the assessed fair value determined in the first step to the assets and liabilities of the
reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the
assets and liabilities is the implied fair value of goodwill. This allocation process is only performed
for purposes of evaluating goodwill impairment and does not result in an entry to adjust the value
of any assets or liabilities. An impairment loss is recognized for any excess in the carrying value of
goodwill over the implied fair value of goodwill.
Management performed the annual goodwill impairment test as of December 31, 2004 and
an impairment loss of $58,397 was recorded for the Perfect Media Holding Ltd. (“Perfect
Media”) reporting unit. The fair value of the Perfect Media reporting unit was estimated using
a combination of expected present value of future cash flow and income approach valuation
methodologies. The Group recorded an impairment charge because the amount the Group paid
for the acquisition of Perfect Media exceeded its fair market value. Commencing in 2005, the
financial information of Perfect Media was prepared together with that of Commercial location
network. Management also performed an annual goodwill impairment test for each of its reporting
units as of December 31, 2005 and 2006, and no impairment loss was required.
��
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006
(In U.S. dollars except share data and unless otherwise stated)
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2. SUMMary OF SIGNIFICaNT aCCOUNTING POLICIeS (continued)
(k) Goodwill (continued)
The changes in the carrying amount of goodwill by segment for the year ended December 31,
2004, 2005 and 2006 are as follows:
Out-of-Home
Television
advertising
Services
In-elevator
Poster-frame
advertising
Services
Mobile
Handset
advertising
Services Others Total
Balance as of January 1, 2004 $ — $ — $ — $ — $ —
Goodwill acquired during the year 9,519,658 — — — 9,519,658
Modification of preliminary purchase
price allocation (18,124) — — — (18,124)
Tax benefits arising from acquired
subsidiaries (385,051) — — — (385,051)
Impairment losses (58,397) — — — (58,397)
Balance as of December 31, 2004 $ 9,058,086 $ — $ — $ — $ 9,058,086
Goodwill acquired during the year 4,043,747 — — — 4,043,747
Tax benefits arising from acquired
subsidiaries (244,236) — — — (244,236)
Modification of preliminary purchase
price allocation 64,477 — — — 64,477
Translation adjustments 375,998 — — — 375,998
Balance as of December 31, 2005 $ 13,298,072 $ — $ — $ — $ 13,298,072
Goodwill acquired during the year 374,932,052 96,926,862 8,364,095 — 480,223,009
Modification of preliminary purchase
price allocation 5,177,181 2,756,299 80,369 — 8,013,849
Goodwill recorded as a result of
contingent consideration resolved — 237,879,480 — — 237,879,480
Translation adjustments 329,461 — — — 329,461
Balance as of December 31, 2006 $ 393,736,766 $ 337,562,641 $ 8,444,464 $ — $ 739,743,871
�0
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006 (In U.S. dollars except share data and unless otherwise stated)
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2. SUMMary OF SIGNIFICaNT aCCOUNTING POLICIeS (continued)
(l) revenue recognition
The Group’s revenues are primarily derived from advertising services and to a lesser extent, sales
from advertising equipment. Revenues from advertising services, net of agency rebates, are
recognized ratably over the year in which the advertisement is displayed. Revenues from the sale
of advertising equipment are recognized once the advertising equipment is delivered. Accordingly,
revenue is recognized when all four of the following criteria are met: (i) pervasive evidence that
an arrangement exists; (ii) delivery of the products and/or services has occurred and risks
and rewards of ownership have passed to the customer; (iii) the selling price is both fixed and
determinable; and (iv) collection of the resulting receivable is reasonably assured.
The Group entered into franchise arrangements with a number of third party franchisors. In
accordance with SFAS 45, revenue from initial franchise fees was recognized when the franchise
sale transaction was completed, that is, when all material services or conditions relating to the
sale had been substantially performed or satisfied by the franchisor.
Prepayments for the advertising services are deferred and recognized as revenue when the
advertising services are rendered.
�1
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006
(In U.S. dollars except share data and unless otherwise stated)
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2. SUMMary OF SIGNIFICaNT aCCOUNTING POLICIeS (continued)
(l) revenue recognition (continued)
The Group presents advertising service revenue, net of sales taxes incurred, as follows:
For the years ended December 31,2004 2005 2006
(In U.S. dollars, except per share data)
Advertising Service Revenue, Net of
Agency rebatesCommercial Locations— Unrelated parties $ 25,386,634 $ 59,434,823 $ 130,474,324— Related parties 3,722,778 7,991,434 15,227,937
Total Commercial Locations 29,109,412 67,426,257 145,702,261
In-store Network— Unrelated parties — 5,475,192 25,330,654— Related parties — 517,998 4,380,287
Total in-store network — 5,993,190 29,710,941
In-elevator poster frame— Unrelated parties — — 44,893,004— Related parties — — —
Total In-elevator poster frame — — 44,893,004
Mobile handset advertising— Unrelated parties — — 10,880,075— Related parties — — —
Total mobile handset advertising — — 10,880,075
Advertising Services Revenue: 29,109,412 73,419,447 231,186,281
Less: Sales taxes:Commercial Locations 2,788,233 5,991,497 13,641,118In-store Network — 524,271 2,803,349In-elevator poster frame — — 3,988,769Mobile handset advertising — — 779,110
Total sales taxes 2,788,233 6,515,768 21,212,346
Net advertising Service revenue 26,321,179 66,903,679 209,973,935Add: Other Revenue: 2,888,720 1,325,234 1,931,530
Net revenues: $ 29,209,899 $ 68,228,913 $ 211,905,465
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Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006 (In U.S. dollars except share data and unless otherwise stated)
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2. SUMMary OF SIGNIFICaNT aCCOUNTING POLICIeS (continued)
(m) Operating Leases
Leases where substantially all the rewards and risks of ownership of assets remain with the
leasing company are accounted for as operating leases. Payments made under operating leases
are charged to the consolidated statements of operations on a straight-line basis over the lease
periods.
(n) advertising Costs
The Group expenses advertising costs as incurred. Total advertising expenses were $17,919,
$45,712 and $1,157,672 for the years ended December 31, 2004, 2005, and 2006, respectively
and have been included as part of selling and marketing expenses.
(o) Foreign Currency Translation
The functional and reporting currency of Focus Media Holding is the United States dollar (“US
dollar”). Monetary assets and liabilities denominated in currencies other than the US dollar
are translated into the US dollar at the rates of exchange ruling at the balance sheet date.
Transactions in currencies other than the US dollar during the year are converted into US dollar
at the applicable rates of exchange prevailing at the first day of the month transactions occurred.
Transaction gains and losses are recognized in other income or other expenses.
The financial records of the Group’s subsidiaries and its variable interest entity are maintained in
its local currency, the Renminbi (“RMB”), which is the functional currency. Assets and liabilities
are translated at the exchange rates at the balance sheet date, equity accounts are translated
at historical exchange rates and revenues, expenses, gains and losses are translated using
the average rate for the year. Translation adjustments are reported as cumulative translation
adjustments and are shown as a separate component of other comprehensive income (loss) in
the statement of shareholders’ equity (deficiency).
(p) Income Taxes
Deferred income taxes are recognized for temporary differences between the tax basis of assets
and liabilities and their reported amounts in the financial statements, net operating loss carry
forwards and credits, by applying enacted statutory tax rates applicable to future years. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be realized. Current
income taxes are provided for in accordance with the laws of the relevant taxing authorities.
��
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006
(In U.S. dollars except share data and unless otherwise stated)
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2. SUMMary OF SIGNIFICaNT aCCOUNTING POLICIeS (continued)
(q) Comprehensive Income
Comprehensive income includes foreign currency translation adjustments and unrealized gains
(losses) on marketable securities classified as available-for-sale debt securities. Comprehensive
income is reported in the statements of shareholders’ equity (deficiency).
(r) Fair value of Financial Instruments
Financial instruments include cash and cash equivalents, investment in available-for-sale debt
securities, and short-term loans. The carrying values of cash and cash equivalents, investment
in available-for-sale debt securities and short-term borrowing approximate their fair values due to
their short-term maturities.
(s) Share-based Compensation
Effective January 1, 2006 the Group adopted SFAS No. 123 (revised 2005), “Share-Based
Payment” (“SFAS 123-R”), using the modified prospective application transition method, which
establishes accounting for share-based awards exchanged for employee services. Accordingly,
share-based compensation cost is measured at grant date, based on the fair value of the award,
and recognized in expense over the requisite service period. The Group previously applied
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB
25”), and related Interpretations and provided the pro forma disclosures required by SFAS No.
123, “Accounting for Stock-Based Compensation” (“SFAS 123”). APB 25 required the Group to
record a compensation charge for the excess of the market value of the share at the grant date
or any other measurement date over the amount an employee must pay to acquire the share. The
compensation expense is recognized over the service period which is the vesting period.
Periods prior to the adoption of SFAS 123-R
Prior to the adoption of SFAS 123-R, the Group provided the disclosures required under SFAS
123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition
and Disclosures”.
�4
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006 (In U.S. dollars except share data and unless otherwise stated)
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2. SUMMary OF SIGNIFICaNT aCCOUNTING POLICIeS (continued)
(s) Share-based Compensation (continued)
Periods prior to the adoption of SFAS 123-R (continued)
The following table illustrates the effect on net income and income per share as if the Group had
applied the fair value recognition provisions of SFAS 123 to options granted under the Group’s
share-based compensation plans prior to the adoption. For purposes of this pro forma disclosure
the value of the options was estimated using the Black-Scholes option-pricing model and
amortized using an accelerated method over the respective vesting periods of the awards.
year ended December 31,2004 2005
Net income, as reported $ 372,752 $ 23,547,651Add: Share-based compensation as reported 488,711 726,503Less: Share-based compensation determined using the fair
value method (566,819) (3,225,668)
Pro forma net income $ 294,644 $ 21,048,486Deemed dividend on Series A convertible redeemable
preference shares (8,308,411) —Deemed dividend on Series B convertible redeemable
preference shares (2,191,442) —Deemed dividend on Series C-1 convertible redeemable
preference shares (13,356,087) —Premium of Series B convertible redeemable preference
shares 12,906,774 —
Pro forma net income (loss) attributable to holders of ordinary
shareholders $ (10,654,522) $ 21,048,486
Basic income (loss) per share:As reported $ (0.07) $ 0.09
Pro forma $ (0.07) $ 0.08
Diluted income (loss) per share:As reported $ (0.07) $ 0.06
Pro forma $ (0.07) $ 0.06
��
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006
(In U.S. dollars except share data and unless otherwise stated)
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2. SUMMary OF SIGNIFICaNT aCCOUNTING POLICIeS (continued)
(s) Share-based Compensation (continued)
Periods prior to the adoption of SFAS 123-R (continued)
As required by SFAS 123-R, management has made an estimate of expected forfeitures and is
recognizing compensation costs only for those equity awards expected to vest. The cumulative
effect of initially adopting SFAS 123-R was not significant. The Group’s total share-based
compensation expense for the year ended December 31, 2006 was $8,367,406. As a result of
adopting SFAS 123-R, income before income tax and net income were both lower by $8,119,732
than if the Group had continued to account for share-based compensation under APB 25. The
impact on basic and diluted earnings per shares in 2006 was a decrease of $0.02 and $0.02 per
share respectively.
The following table summarizes the share-based compensation recognized in the consolidated
statement of operations:
2004 2005 2006
Cost of sales $ — $ — $ 146,942General and administrative 461,183 683,186 6,130,076
Selling and marketing 27,528 43,317 2,090,388
(t) Income (loss) per Share
Basic income (loss) per share is computed by dividing income (loss) attributable to holders of
ordinary shares by the weighted average number of ordinary shares outstanding during the year.
Diluted income per ordinary share reflects the potential dilution that could occur if securities
or other contracts to issue ordinary shares were exercised or converted into ordinary shares.
Ordinary share equivalents are excluded from the computation in loss years as their effects would
be anti-dilutive.
(u) recently Issued accounting Standards
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”),
which defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies
under most other accounting pronouncements that require or permit fair value measurements
and does not require any new fair value measurements. This statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years, with earlier application encouraged. The provisions of SFAS 157 should
be applied prospectively as of the beginning of the fiscal year in which the statement is initially
applied, except for a limited form of retrospective application for certain financial instruments. The
Group is currently evaluating the impact, if any, of this statement on the consolidated financial
statements and related disclosures.
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Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006 (In U.S. dollars except share data and unless otherwise stated)
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2. SUMMary OF SIGNIFICaNT aCCOUNTING POLICIeS (continued)
(u) recently Issued accounting Standards (continued)
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, (“SFAS 159”). SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Group is currently evaluating the impact, if any, of this
statement on its consolidated financial statements and related disclosures.
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting
for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The Group adopted FIN 48 on January 1, 2007 and
estimated the cumulative effect on adoption of FIN48 to be a reduction of consolidated retained
earnings as of January 1, 2007 of approximately $1.5 million.
In June 2006, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 06-3,
“How Taxes Collected from Customers and Remitted to Governmental Authorities Should be
Presented in the Income Statement (That Is, Gross Versus Net Presentation)” (“EITF 06-3”). The
scope of EITF 06-3 includes sales, use, value added and some excise taxes that are assessed
by a governmental authority on specific revenue-producing transactions between a seller and
customer. EITF 06-3 states that a company should disclose its accounting policy (i.e. gross or
net presentation) regarding the presentation of taxes within its scope, and if significant, these
disclosures should be applied retrospectively to the financial statements for all periods presented.
EITF 06-3 is effective for interim and annual reporting periods beginning after December 15,
2006. The Group is currently evaluating the impact, if any, of this statement on its consolidated
combined financial statements and related disclosures.
(v) reclassification
Certain prior year amounts have been reclassified to conform to the current period’s presentation.
��
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006
(In U.S. dollars except share data and unless otherwise stated)
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3. aCQUISITIONS
2004 acquisitions:
In 2004, the Group acquired 10 entities in order to expand their out-of-home television advertising
networks for total cash consideration of $4,921,069. As a result of these acquisitions, the Group
recorded goodwill and intangible assets of $4,657,492 and $603,520, respectively. All of the goodwill
was assigned to the out-of-home television advertising services segment.
In addition, on September 22, 2004, the Group acquired 100% of the outstanding ordinary shares of
Perfect Media which includes its then variable interest entity Shanghai Perfect Media, an advertising
services provider, in exchange for cash of $500,000 and 14,594,200 ordinary shares having a fair
value $4,484,798, or approximately $0.31 per ordinary share, The fair value of the Group’s ordinary
shares was determined by management considering multiple factors, including a retrospective valuation
performed by a third party valuation firm.
The valuation was based on the guideline companies approach which incorporates the market
performance of comparable listed companies as well as the financial results and growth trends of the
Group to derive the total equity value of the Group. The valuation model then allocated the equity value
between the ordinary shares and the preference shares and determined the fair value of ordinary shares
based on two scenarios: preference shares that have a value in excess of their conversion price were
treated as if they had converted into ordinary shares; and preference shares that have a value below
their conversion price were assigned a value that took into consideration their liquidation preference.
Ordinary shares were assigned a value equal to their pro rata share of the residual amount (if any) that
remained after consideration of the liquidation preference of preferred stock with a value below their
conversion price.
The acquisition was recorded using the purchase method of accounting and, accordingly, the acquired
assets and liabilities were recorded at their fair market value at the date of acquisition. The Group’s
primary reason for the acquisition of Perfect Media was its complementary business model and its
strong relationships with landlords and property managers of commercial building locations in which the
Group desired to locate its flat-panel displays. The acquisition of Perfect Media resulted in a significant
amount of goodwill because the amount the Group paid for Perfect Media exceeded its fair market
value. The Group was willing to pay in excess of Perfect Media’s fair market value in order to maintain its
competitive advantage within the commercial buildings the Group already occupied.
��
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006 (In U.S. dollars except share data and unless otherwise stated)
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3. aCQUISITIONS (continued)
2004 acquisitions: (continued)
The purchase price was allocated as follows:
amortization
Period
Net tangible assets acquired $ 40,597Intangible assets:
Lease Agreements 185,947 2.3 yearsCustomer base 14,016 7 years
Goodwill 4,744,238 N/A
Total $ 4,984,798
2005 acquisitions:
In 2005, the Group acquired nine entities in order to further expand its out-of-home television
advertising network for total consideration of $3,083,244, which was paid primarily in cash. As a result
of these acquisitions, the Group recorded goodwill and intangible assets of $2,847,388 and $382,400,
respectively. All of the goodwill was assigned to the out-of-home television advertising services segment.
In addition, on March 21, 2005, the Group acquired Capital Beyond Limited, including its then
variable interest entity Guangdong Framedia, an advertising services provider, in exchange for cash
consideration of $2,054,008, all of which was paid as of December 31, 2005. The acquisition was
recorded using the purchase method of accounting and, accordingly, the acquired assets and liabilities
were recorded at their fair market value at the date of acquisition. The purchase price was allocated as
follows:
amortization
period
Net tangible assets acquired $ 337,252Intangible assets:
Lease agreements 471,818 2.3 yearsCustomer base 10,633 7 years
Goodwill 1,234,305 N/A
Total $ 2,054,008
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Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006
(In U.S. dollars except share data and unless otherwise stated)
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3. aCQUISITIONS (continued)
2006 acquisitions:
On January 1, 2006, the Group acquired Infoachieve Limited (“Infoachieve”), which included its then
variable interest entity Shanghai Framedia Advertising Development Ltd. (“Framedia”), the largest in-
elevator poster frame advertising network operator in China. The purchase price included cash of
$39,600,000, all of which was paid as of December 31, 2005, and 22,157,003 ordinary shares having
a fair value of $54,690,130, or approximately $2.47 per ordinary share. The fair value of the ordinary
shares was based on the average market price of Focus Media Holding’s ordinary shares over the three
days before, the day of and three days after the terms of the acquisition were agreed to and announced.
Framedia achieved certain earnings targets for the year ended December 31, 2006 and, as a result,
on June 15, 2007 the Group issued 35,830,619 ordinary shares as additional purchase consideration.
As the contingency was resolved as of December 31, 2006, the Group recorded $237,879,480 in
consideration payable as a component of shareholders’ equity, which represents the fair value of the
35,830,619 shares as of December 31, 2006.
The aggregate purchase price is comprised of the following:
Cash consideration $ 39,600,000Other acquisition costs 311,110Value of the ordinary shares issued 54,690,130Value of contingent consideration resolved (ordinary shares to be issued) 237,879,480
Total consideration $ 332,480,720
The acquisition was recorded using the purchase method of accounting and, accordingly, the acquired
assets and liabilities were recorded at their fair market value at the date of acquisition as follows:
amortization
period
Net tangible liabilities assumed $ (8,443,960)Intangible assets:
Lease agreements 8,281,999 6 yearsCustomer base 2,664,685 7 yearsNon-compete agreement 463,558 3 yearsTrademark 939,377 1 yearsContract backlog 70,120 1 years
Goodwill 328,504,941 N/A
Total $ 332,480,720
The goodwill was assigned to the in-elevator poster frame advertising services segment.
�0
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006 (In U.S. dollars except share data and unless otherwise stated)
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3. aCQUISITIONS (continued)
2006 acquisitions: (continued)
On February 28, 2006, the Group acquired Target Media Holdings Limited (“Target Media”), which
used to be the Group’s biggest competitor in out-of-home television advertising services, and its
wholly-owned subsidiary, Target Media Multi-Media technology (Shanghai) Co., Ltd. (“TMM”), and a
consolidated variable interest entity, Shanghai Target Media Co., Ltd. (“STM”), one of the largest out-of-
home advertising network operators in China. The purchase price included cash of $94,000,000, all of
which was paid in 2006, and 77,000,000 ordinary shares having a fair value of $310,464,000, or $4.032
per ordinary share. The fair value of the ordinary shares was based on average market price of Focus
Media Holding’s ordinary shares over the three days before, the day of and three days after the terms of
the acquisition were agreed to and announced.
The aggregate purchase price of $407,321,524 consisted of the following:
Cash consideration $ 94,000,000Other acquisition costs 2,857,524Value of the ordinary shares issued 310,464,000
Total consideration $ 407,321,524
The acquisition was recorded using the purchase method of accounting and, accordingly, the acquired
assets and liabilities were recorded at their fair market value at the date of acquisition as follows:
amortization
period
Net tangible assets acquired $ 19,629,853Intangible assets:
Lease agreements 4,510,494 10 yearsCustomer base 449,631 7 yearsTrademark 5,721,874 10 yearsContract backlog 148,550 1 years
Goodwill 376,861,122 N/A
Total $ 407,321,524
The goodwill was assigned to the out-of-home television advertising services segment.
The purchase price allocation and intangible asset valuations for each of the two acquisitions described
above were determined by management based on a number of factors including a valuation report
provided by a third party valuation firm. The valuation report utilized and considered generally accepted
valuation methodologies such as the income, market, cost and actual transaction of Group shares
approach. The Group has incorporated certain assumptions which include projected cash flows and
replacement costs.
�1
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006
(In U.S. dollars except share data and unless otherwise stated)
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3. aCQUISITIONS (continued)
2006 acquisitions: (continued)
In the valuation of lease agreements, customer base and contract backlog, an indication of value
was developed through the application of a form of income approach, known as excess earnings
method. The first step to apply the excess earning method was to estimate the future debt-free net
income attributable to the intangible asset. The resulting debt-free net income was then reduced by
an estimated fair rate of return on contributory assets necessary to realize the projected earnings
attributable to the intangible assets. These assets include fixed assets, working capital and other
intangible assets.
The valuation of the trademark was based on the relief from royalty method whereby an asset is valued
based upon the after-tax cash flow savings accruing to the owner by virtue of the fact that the owner
does not have to pay a “fair royalty” to a third party for the use of that asset. Accordingly, a portion of
the owner’s earnings, equal to the after-tax royalty that would have been paid for use of the asset can
be attributed to that asset. The value of the asset depends on the present worth of future after-tax
royalties attributable to the asset to their present worth at market-derived rates of return appropriate for
the risks of that particular asset.
Also in 2006, the Group completed a number of individually insignificant acquisitions which are
described below:
On March 21, 2006, the Group acquired Dotad Media Holdings Limited (“Dotad’”) in exchange for cash
consideration of $15,000,000, all of which was paid as of December 31, 2006. On June 15, 2007,
additional 1,500,000 ordinary shares were issued as Dotad has met its earning targets in the first year
it was acquired. An additional 1,500,000 ordinary shares is issuable contingent upon Dotad’s meeting
certain earning targets in 2007. The Group acquired intangible assets of $6,587,095 and recognized
goodwill of $8,444,464. The goodwill was assigned to the mobile handset advertising services segment.
The Group acquired three entities in the poster-frame advertising business for cash consideration of
$10,670,222. The Group recognized acquired intangible assets of $1,682,771 and recognized goodwill
of $9,057,700, which was assigned to the in-elevator poster frame advertising services segment.
The Group acquired three entities which provide out-of-home television advertising services and the
remaining minority interest in six subsidiaries, for cash consideration of $5,314,923 and 97,190 ordinary
shares. Certain of these acquisitions have contingent consideration based on future earnings targets,
The group recognized acquired intangible assets of $12,507 and recognized goodwill of $3,453,332,
which was assigned to the out-of-home television advertising services segment.
��
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006 (In U.S. dollars except share data and unless otherwise stated)
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3. aCQUISITIONS (continued)
2006 acquisitions: (continued)
The Group acquired 70% of the outstanding ordinary shares of Appreciated Capital Ltd. and its then
variable interest entity Beijing YangShiSanWei Advertisement Co., Ltd. (collectively, “ACL”). ACL sells
advertising in movie theatres to its customers. The purchase consideration is fully contingent and is
based on earnings targets for the years ending August 31, 2007, 2008 and 2009, subject further to the
attainment of certain operational targets. The Group advanced $2.8 million to ACL. The purchase price
allocation can not be completed until the contingent consideration is resolved. As such, the Group has
recorded a liability of $358,574, which is equal to the excess of the fair value of the assets acquired over
cost on the date of acquisition.
Pro forma (unaudited)
The following summarized unaudited pro forma results of operations for the years ended December
31, 2004, 2005 and 2006, have been prepared assuming that the individually material acquisitions,
being Infoachieve Limited, Target Media Holdings Limited, Capital Beyond Limited and Perfect Media,
occurred as of January 1, 2004, 2005 and 2006. These pro forma results have been prepared for
comparative purposes only based on management’s best estimate and do not purport to be indicative
of the results of operations which actually would have resulted had the acquisitions occurred as of
January 1, 2004, 2005 and 2006.
Pro forma
year ended December 31,2004 2005 2006
(unaudited) (unaudited) (unaudited)
Revenues $ 29,296,705 $ 113,750,432 $ 214,973,755Net income (loss) attributable to holders of
ordinary shares (10,703,970) 3,127,583 74,924,057Income (loss) per share — basic $ (0.06) $ 0.01 $ 0.14Income (loss) per share — diluted $ (0.06) $ 0.01 $ 0.14
4. INveSTMeNT IN DeBT SeCUrITIeS
The following is a summary of short-term available-for-sale debt securities:
December 31,2004 2005 2006
Debt Securities $ — $ 35,000,000 $ —Gross unrealized loss — (164,150) —
Fair Value $ — $ 34,835,850 $ —
��
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006
(In U.S. dollars except share data and unless otherwise stated)
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5. aCCOUNTS reCeIvaBLe, NeT
Accounts receivable, net consists of the following:
December 31,2004 2005 2006
Billed receivables $ 4,782,521 $ 13,684,419 $ 37,922,093Unbilled receivables 1,837,428 7,504,112 23,692,250
Total $ 6,619,949 $ 21,188,531 $ 61,614,343
Unbilled receivables represent amounts earned under advertising contracts in progress but not billable
at the respective balance sheet dates. These amounts become billable according to the contract term.
The Group anticipates that substantially all of such unbilled amounts will be billed and collected within
twelve months of balance sheet dates.
6. aCQUIreD INTaNGIBLe aSSeTS, NeT
As of December 31, 2004, 2005 and 2006, the Group has the following amounts related to intangible
assets:
December 31,2004 2005 2006
Cost: Operation and broadcasting rights $ — $ — $ 6,403,114 Lease agreements 511,929 1,249,843 16,336,586 Customer bases 273,820 430,879 7,827,587 Trademark — — 6,861,065 Acquired technology — — 2,546,519 Others — — 1,177,276
Total $ 785,749 $ 1,680,722 $ 41,152,147
Accumulated amortization: Operation and broadcasting rights $ — $ — $ 80,039 Lease agreements 58,888 447,578 3,015,639 Customer bases 18,555 75,224 1,051,403 Trademark — — 1,462,163 Acquired technology — — 381,978 Others — — 443,906
Total $ 77,443 $ 522,802 $ 6,435,128
Intangible assets, net: $ 708,306 $ 1,157,920 $ 34,717,019
�4
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006 (In U.S. dollars except share data and unless otherwise stated)
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6. aCQUIreD INTaNGIBLe aSSeTS, NeT (continued)
The Group recorded amortization expense as follows:
year December 31,2004 2005 2006
Cost of revenues $ 58,888 $ 382,359 $ 3,207,079Selling and marketing 18,555 55,478 2,567,002
Total $ 77,443 $ 437,837 $ 5,774,081
The Group will record amortization expense of $5,724,504, $5,490,514, $5,148,733, $5,078,621 and
$4,585,056 for the years ended December 31, 2007, 2008, 2009, 2010 and 2011, respectively.
7. eQUIPMeNT, NeT
Equipment, net consists of the following:
December 31,2004 2005 2006
Media display equipment $ 9,384,262 $ 40,191,968 $ 77,088,464Computers and office equipment 675,053 1,267,696 3,360,590Leasehold improvements 167,932 537,130 713,524Vehicles 83,834 349,575 658,825
$ 10,311,081 $ 42,346,369 $ 81,821,403Less: accumulated depreciation and amortization (1,142,742) (5,975,119) (22,767,910)
9,168,339 36,371,250 59,053,493Assembly in progress 28,804 7,323,638 11,195,831
Total $ 9,197,143 $ 43,694,888 $ 70,249,324
Depreciation expense for 2004, 2005 and 2006 was $870,597, $4,489,178 and $13,666,912,
respectively.
Assembly in process relates to the assembly of flat-panel television screens. No provision for
depreciation is made on assembly in process until such time as the relevant assets are completed and
put into use.
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Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006
(In U.S. dollars except share data and unless otherwise stated)
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8. SHOrT-TerM LOaNS
December 31,2004 2005 2006
Short term bank loan (a) $ — $ 991,301 $ —Other loan due to ex-shareholders of Framedia (b) — — 2,769,459
Total $ — $ 991,301 $ 2,769,459
(a) The Group had $nil, $991,301 and $nil outstanding under line of credit arrangement as of December 31, 2004, 2005 and
2006, respectively. The amount available for additional borrowings under this line of credit at December 31, 2004, 2005 and
2006 was $nil, $2,106,516 and $nil, respectively. The line of credit was subject to an interest rate of 10%, discounted by an
amount equal to the six month loan interest rate of The People’s Bank of China. As of December 31, 2005, the line of credit
bore interest at 4.698% per annum. The Group recorded interest expense under the line of credit in 2004, 2005 and 2006 of
$nil, $49,873 and $305,287, respectively.
(b) At December 31, 2006, the short-term loan from ex-shareholders of Framedia are non-interest bearing, all of which are
repayable within one year.
9. aCCrUeD exPeNSeS aND OTHer CUrreNT LIaBILITIeS
Accrued expenses and other current liabilities consist of the following:
December 31,2004 2005 2006
Accrued sales commissions $ 691,888 $ 2,583,270 $ 5,813,761Other accrued expenses 67,929 577,863 1,844,781Other taxes payables 1,728,850 3,037,443 7,451,787Advance from customers 1,459,976 3,387,224 6,381,032Accrued employee payroll and welfare 473,054 1,059,717 1,465,142Accrued offering costs 767,821 — —Payables related to acquisitions 538,860 99,130 4,530,745Amount due to minority shareholders of subsidiary 426,858 200,848 —Withholding individual PRC income tax — — 9,046,576Others 436,199 801,407 2,140,351
Total $ 6,591,435 $ 11,746,902 $ 38,674,175
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Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006 (In U.S. dollars except share data and unless otherwise stated)
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10. SHare-BaSeD COMPeNSaTION
In June 2003, the Group adopted the 2003 Employee Share Option Scheme (“2003 Plan”) under which
not more than 30% of issued share capital was reserved for grants of options. In May 2005, the Group
adopted the 2005 Share Option Plan (“2005 Plan”), under which the amount of options that may issue
has been reduced to an aggregate of 20% of issued share capital, including the 10.87% already granted
under the 2003 Plan. In addition, during the three years after the adoption of our 2005 Plan, the Group
may issue no more than 5% of issued share capital for grants of options. In October 2006, the Group
further adopted the 2006 Employee Share Option Plan (“2006 Plan”), under which the Group may
issue no more than 3.6% of issued ordinary shares for grant of options. The option plans are intended
to promote the success and to increase shareholder value by providing an additional means to attract,
motivate, retain and reward selected directors, officers, employees and third-party consultants and
advisors.
In 2004, 2005 and 2006, options to purchase 25,208,200 and 23,843,630 and 14,800,000 ordinary
shares were authorized under the option plans, respectively. Under the terms of each option plan,
options are generally granted at prices equal to the fair market value as determined by the Board
of Directors, expire 10 years from the date of grant and generally vest over three years while certain
options granted vest over one year. Subsequent to the initial public offering, options were generally
granted at the fair market value of the ordinary shares at the date of grant. As of December 31, 2004,
2005 and 2006, options to purchase 25,208,200 and 49,051,830 and 37,515,150 ordinary shares were
granted to employees and non-employees. Share options granted to external consultants and advisors
in exchange for services were expensed based on the estimated fair value utilizing the Black-Scholes
option pricing model.
The fair value of options granted is estimated on the date of grant using the Black-Scholes option-
pricing model with the following weighted-average assumptions:
2004 2005 2006
Option granted to employees: Average risk-free rate of return 2.97% 3.10–4.43% 4.74%–4.80% Weighted average expected option life 1–3 years 2–3 years 2 years Volatility rate 36.2% 30.49%–36.2% 40.0–53.7% Dividend yield 0% 0% 0%
Prior to the initial public offering in July 2005, the derived fair value of the ordinary shares underlying
the options was determined by management by factoring into their consideration a retrospective
valuation conducted by a third party valuation firm using a generally accepted valuation methodology,
the guideline companies approach, which incorporates certain assumptions including the market
performance of comparable listed companies as well as the financial results and growth trends of the
Group, to derive the total equity value of the Group. The valuation model allocated the equity value
between the ordinary shares and the preference shares and determined the fair value of ordinary shares
based on two assumptions: where conversion into ordinary shares would result in a higher economic
value, preference shares were treated as if they had converted into ordinary shares; and preference
shares that have a value higher than their conversion price were assigned a value that took into
consideration their liquidation preference.
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Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006
(In U.S. dollars except share data and unless otherwise stated)
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10. SHare-BaSeD COMPeNSaTION (continued)
The ordinary shares were assigned a value equal to their pro rata share of the residual amount, if any,
that remained after consideration of the liquidation preference of preferred shares with a value below
their conversion price. Also prior to July 2005, the expected volatilities are estimated based on the
average volatility of comparable companies with the time period commensurate with the expected
time period. Following the initial public offering, the expected volatilities were estimated based on the
historical volatility. The expected term of options granted represents the period of time that options
granted are expected to be outstanding. The risk-free interest rate assumption is determined using the
Federal Reserve nominal rates for U.S. Treasury zero-coupon bonds with maturities similar to those of
the expected term of the award.
The weighted average fair value of options granted as of December 31, 2004, 2005 and 2006 was $0.09,
$0.39 and $1.77, respectively.
A summary of the share option activities are as follows:
Number of
shares
weighted
average
exercise
price
weighted
remaining
contract term
(in years)
aggregate
intrinsic value
Options outstanding at January 1,
2006 49,051,830 $ 0.89Granted 14,800,000 5.60Cancelled — —Exercised 26,336,680 0.58
Options outstanding at December
31, 2006 37,515,150 $ 2.97 8.81 years $ 137,600,699
Options vested or expected to vest
at December 31, 2006 34,000,844 $ 0.66 7.82 years $ 203,335,095
Options exercisable at December
31, 2006 7,664,164 $ 0.94 8.00 years $ 43,688,834
The total intrinsic value of options exercised during the years ended December 31, 2004, 2005 and
2006, was $nil, $nil and $146,119,111, respectively.
As of December 31, 2006, there was $25,111,999 in total unrecognized compensation expense related
to unvested share-based compensation arrangements, which is expected to be recognized over a
weighted-average period of 1.29 years.
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Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006 (In U.S. dollars except share data and unless otherwise stated)
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11. INCOMe TaxeS
Cayman Islands
Under the current laws of the Cayman Islands, the Company is not subject to tax on income or capital
gain. In addition, upon payments of dividends by the Company to its shareholders, no Cayman Islands
withholding tax will be imposed.
British virgin Islands
The Group’s subsidiaries incorporated in the BVI are not subject to taxation.
Hong Kong
Focus Media (China) Holding Ltd.is subject to Hong Kong profit tax at a rate of 17.5% on its assessable
profit. No Hong Kong profit tax has been provided as the Group does not have assessable profit that is
earned in or derived from Hong Kong during the years presented.
PrC
Pursuant to the PRC Income Tax Laws, the Company’s subsidiaries and VIEs are generally subject
to Enterprise Income Taxes (“EIT”) at a statutory rate of 33%, which comprises 30% national income
tax and 3% local income tax. Some of the Company’s subsidiaries and VIEs are newly incorporated
enterprises engaged in the advertising industry which are entitled to a two-year tax exemption holiday,
commencing from the first operating year. One of the subsidiaries of the Company, Beijing Focus Media
Wireless Co., Ltd., is a qualified new technology enterprise and under PRC Income Tax Laws and is
subject to a preferential tax rate of 15%, plus a three-year tax exemption followed by three years with a
50% reduction in the tax rate, commencing from the first profitable year.
On March 16, 2007, the PRC National People’s Congress passed the China Corporate Income Tax
Law which will change the income tax rates for most enterprises from 33% at the present to 25%. This
new law will become effective on January 1, 2008. There will be a transition period for enterprises,
whether foreign-invested or domestic, which currently receive preferential tax treatments granted by
relevant tax authorities. Enterprises that are subject to an enterprise income tax rate lower than 25%
may continue to enjoy the lower rate and gradually transition to the new tax rate within five years after
the effective date of the new law. Enterprises that are currently entitled to exemptions or reductions
from the standard income tax rate for a fixed term may continue to enjoy such treatment until the fixed
term expires. Preferential tax treatments will continue to be granted to industries and projects that
are strongly supported and encouraged by the state, and enterprises that qualify as “new and high
technology enterprises strongly supported by the state” will be entitled to a 15% enterprise income tax
rate.
Most of the Company’s subsidiaries and VIEs are expected to transition from 33% to 25% starting
from January 1, 2008. Those that currently enjoy a lower tax rate of 15% will gradually transition to the
uniform tax rate of 25% from 2008 to 2012 unless the company obtains the “new and high technology
enterprise” status under the new tax law.
��
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006
(In U.S. dollars except share data and unless otherwise stated)
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11. INCOMe TaxeS (continued)
Composition of income tax expense
The current and deferred portion of income tax expense (benefit) included in the consolidated
statements of operations for the years ended December 31 is as follows:
2004 2005 2006
Current income tax expense $ 828,962 $ 715,117 $ 1,106,921Deferred income tax expense (benefit) 78,588 (20,664) (63,383)
Income tax expense $ 907,550 $ 694,453 $ 1,043,538
reconciliation of the differences between statutory tax rate and the effective tax rate
Reconciliation between total income tax expense and that amount computed by applying the PRC
statutory income tax rate of 33% to income before taxes is as follows:
years ended December 31,2004 2005 2006
Statutory rate 33.0% 33.0% 33.0%Effect of different tax rate of group entities operation in
other jurisdiction 318.4% 0.0% 2.4%Effect on tax holiday -182.8% -31.5% -35.6%Permanent differences -78.4% 1.1% 2.2%Change in valuation allowance -18.6% 0.2% -0.7%
Effective tax rate 71.6% 2.8% 1.3%
The following table sets forth the effects of the tax holidays granted to the entities of the Group for the
periods presented:
year ended December 31,2004 2005 2006
Tax holiday effect $ 7,007,620 $ 23,212,97 $ 99,641,998Net income per share effect — basic $ 0.04 $ 0.09 $ 0.20Net income per share effect — diluted $ 0.04 $ 0.06 $ 0.19
�0
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006 (In U.S. dollars except share data and unless otherwise stated)
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11. INCOMe TaxeS (continued)
reconciliation of the differences between statutory tax rate and the effective tax rate
(continued)
The principal components of the Group’s deferred income tax assets/liabilities are as follows:
December 31,2004 2005 2006
Deferred tax assets: Net operating loss carry forwards $ 276,673 $ 545,208 $ 2,317,316 Accrued expenses temporarily non-deductible 54,281 46,695 242,106 Pre-operating expenses 62,862 80,102 — Bad debt provision 57,147 130,897 704,429
Total deferred tax assets $ 450,963 $ 802,902 $ 3,263,851Valuation allowance on deferred tax assets — (59,988) (2,438,008)
Net deferred tax assets $ 450,963 $ 742,914 $ 825,843
December 31,2004 2005 2006
Deferred tax liabilities: Intangible asset basis difference $ — $ — $ 3,303,110
Total deferred tax liabilities $ — $ — $ 3,303,110
A significant portion of the deferred tax assets recognized relate to net operating loss carry forwards.
The Group had tax losses of $7,689,311 as of December 31, 2006 to be carried forward against
future taxable income, it will expire, if unused, in the years ending December 31, 2008 through 2011.
The Group operates through multiple subsidiaries and the valuation allowance is considered on each
individual subsidiary basis. Where a valuation allowance was not recorded, the Group believes that
there was sufficient positive evidence to support its conclusion not to record a valuation allowance as it
expects to generate sufficient taxable income in the future.
The valuation allowance in 2005 and 2006 has been increased in connection with an increase in net
operating losses for which the Group believes it cannot generate future taxable income sufficient to
recognize the income tax benefit.
�1
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006
(In U.S. dollars except share data and unless otherwise stated)
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12. NeT INCOMe (LOSS) Per SHare
The following table sets forth the computation of basic and diluted income (loss) per share for the years
indicated:
years ended December 31,2004 2005 2006
Income (loss) attributable to holders of ordinary
shares (numerator): $ (10,576,414) $ 23,547,651 $ 83,197,732
Shares (denominator):Weighted average ordinary shares outstanding
used in computing basic income (loss) per
share 160,998,600 252,128,545 505,411,079Plus weighted average preference shares
outstanding — 84,119,675 —Plus incremental weighted average ordinary
shares from assumed conversions of stock
option using treasury stock method — 29,689,874 16,125,302
Weighted average ordinary shares outstanding
used in computing diluted income (loss) per
share 160,998,600 365,938,094 521,536,381
Net income (loss) per share — basic $ (0.07) $ 0.09 $ 0.16
Net income (loss) per share — diluted $ (0.07) $ 0.06 $ 0.16
For the above mentioned years, the Group had securities outstanding which could potentially dilute
basic earnings per share in the future, but which were excluded from the computation of diluted net
income (loss) per share in the years presented, as their effects would have been anti-dilutive. Such
outstanding securities consist of the following:
December 31,2004 2005 2006
Series A convertible redeemable preference shares 41,967,400 — —Series B convertible redeemable preference shares 48,191,600 — —Series C-1 convertible redeemable preference shares 34,054,000 — —Series C-2 convertible redeemable preference shares 34,053,400 — —Outstanding options to purchase ordinary shares 25,208,200 49,051,830 37,515,150
Total 183,474,600 49,051,830 37,515,150
��
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006 (In U.S. dollars except share data and unless otherwise stated)
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13. CONverTIBLe reDeeMaBLe PreFereNCe SHareS
Each Series A, Series B, Series C-1 and Series C-2 convertible redeemable preference shares was
automatically converted into ordinary shares at the then effective conversion price upon the closing
of a qualified underwritten public offering of the ordinary shares of the Group. Upon the completion of
the Group’s initial public offering on July 13, 2005, all of the issued and outstanding Series A, Series
B, Series C-1 and Series C-2 convertible redeemable preference shares were converted into ordinary
shares.
a) In April 2004, the Group issued 52,083,400 Series B convertible redeemable preference shares
to a group of third party investors for cash proceeds of $12,062,696, net of issuance costs
of $437,304. The holders of Series B redeemable convertible preference shares could have
redeemed the Series B convertible redeemable preference shares at any time (i) before December
31, 2006 if the Group received a notice from the holders of a majority of Series B convertible
redeemable preference shares indicating a material breach by the Group and its affiliates of
their representation, warranties or covenants under Series B convertible redeemable preference
shares, the shareholders agreement or the Restructuring Documents (as defined in the amended
Series B Purchase Agreement), or (ii) after April 28, 2004 (“Redemption Start Date”), at the
option of a majority of the holders of the Series B convertible redeemable preference shares then
outstanding. In the event of a redemption pursuant to this right, the Group could have redeemed
up to all of the Series B convertible redeemable preference shares at a redemption price per
redeemable convertible preference share equal to $0.24x(1+(0.15xN)) plus all declared but unpaid
dividends. N refers to a fraction, the numerator of which is the number of calendar days between
April 28, 2004 and the Redemption Start Date and the denominator of which is 365. The Group
recorded a deemed dividend of $2,191,442 in 2004, which resulted from the amortization of the
15% redemption premium associated with Series B convertible redeemable preference shares.
According to the articles of association amended on November 29, 2004, the redemption price of
Series B preferred stock was $0.24.
b) In April 2004, 62,400,000 outstanding ordinary shares were reclassified and re-designated into
62,400,000 Series A convertible redeemable preference shares. The re-designation has resulted
in a deemed dividend of $8,308,411 which represents the difference between the fair value of the
Series A convertible redeemable preference shares at the date of re-designation of $0.15 and the
initial issuance price of the ordinary shares of $0.05 for 10,000,000 shares and approximately $0.01
for 52,400.000 shares.
The holders of Series A convertible redeemable preference shares had the right to cause the
Group to redeem such preference shares, at any time commencing on a Redemption Start Date,
at the option of a majority of holders of Series A redeemable convertible preference shares at a
redemption price per Series A convertible redeemable preference share equal to $0.06 plus all
declared but unpaid dividends. Series A convertible redeemable preference shares could not
have been redeemed until the Group had redeemed all of the Series B convertible redeemable
preference shares and paid the aggregate Series B convertible redeemable preference shares
redemption price in full.
��
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006
(In U.S. dollars except share data and unless otherwise stated)
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13. CONverTIBLe reDeeMaBLe PreFereNCe SHareS (continued)
c) On November 29, 2004, the Group issued 34,053,400 Series C-2 convertible redeemable
preference shares to group of third party investors for cash proceeds of $17,415,000, net of
issuance costs of $85,000. The holder of a Series C-2 convertible redeemable preference share
could have redeemed Series C-2 convertible redeemable preference shares at any time after
the earlier of (i) such time as the holders of a majority of the Series C-2 convertible redeemable
preference share delivered notice in writing to the Group that the Group and/or its affiliates was
in material breach of any of its representations, warranties and covenants under the Series C
Purchase Agreement, the Shareholders Agreement or the Ancillary Documents (as defined in
the Series C Purchase Agreement) so long as such notice was to have been delivered before
December 31, 2006 and (ii) anytime following the fourth anniversary of the issuance of the
Series C-2 convertible redeemable preference share under the Series C Purchase Agreement. In
connection with the redemption of any Series C-2 convertible redeemable preference share, the
Group was to pay a redemption price equal to the Series C-2 convertible redeemable preference
share Issue Price of $0.51 plus all declared but unpaid dividends on the Series C-2 convertible
redeemable preference share through to the date of redemption thereof.
d) On November 29, 2004, certain investors of Series A and/or Series B convertible redeemable
preference shares sold 20,432,600 outstanding Series A convertible redeemable preference
shares and 3,891,800 outstanding Series B convertible redeemable preference shares to Series
C-1 convertible redeemable preference shares investors at a price of US$0.51. These Series A
convertible redeemable preference shares and Series B convertible redeemable preference shares
were re-designated as Series C-1 convertible redeemable preference shares. The re-designation
resulted in a deemed dividend of $8,458,464 which represented the difference between the fair
value of the Series C-1 convertible redeemable preference shares of $0.51 and the issuance
price of Series A and Series B convertible redeemable preference shares of $0.15 and $0.24,
respectively.
e) In December 2004, an investor of ordinary shares sold 9,729,600 outstanding ordinary shares to
third party investors at a price of $0.51. These ordinary shares were re-designated as Series C-1
convertible redeemable preference shares. The re-designation resulted in a deemed dividend of
$4,897,623 which represented the difference between the fair value of the Series C-1 convertible
redeemable preference shares of $0.51 and the issuance price of ordinary shares of $0.01.
Prior to the redemption or conversion of all Series C-2 convertible redeemable preference shares
issued by the Group, any holder of Series C-1 convertible redeemable preference shares thereof could
have, at any time, required the Group to redeem such shares out of funds legally available therefore in
connection with the redemption of any Series C-1 convertible redeemable preference shares under this
Clause, the Group would have paid a redemption price equal to the Series C-1 convertible redeemable
preference shares Issue Price of $0.51 plus all declared but unpaid dividends on the Series C-1
convertible redeemable preference shares through to the date of redemption thereof.
�4
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006 (In U.S. dollars except share data and unless otherwise stated)
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13. CONverTIBLe reDeeMaBLe PreFereNCe SHareS (continued)
The significant terms of the Series A, Series B, Series C-1 and Series C-2 convertible redeemable
preference shares are as follows:
Conversion
Each Series A and Series B convertible redeemable preference share was automatically convertible
into one ordinary share at any time after the date of issuance of such shares, subject to anti-dilution or
performance adjustment based on an initial conversion price of $0.15 and $0.24, respectively, upon the
consummation of a Series A/B Qualified Public Offering or obtaining the necessary written consent from
the holders of Series A and Series B convertible redeemable preference shares. A Series A/B Qualified
Public Offering referred to the closing of an underwritten public offering of the ordinary shares of the
Group in the United States that was registered under the Securities Act of 1933 representing at least
25% of the fully-diluted share capital of the Group immediately following the offering, at a price per share
that values the Group at no less than $200,000,000 immediately prior to the offering.
Each Series C-1 and Series C-2 convertible redeemable preference share was automatically convertible
into one ordinary share at any time after the date of issuance of such shares, subject to anti-dilution or
performance adjustment based on an initial conversion price of $0.51 and $0.51, respectively, upon the
consummation of a Series C Qualified Public Offering or obtaining the necessary written consent from
the holders of Series C-1 and Series C-2 convertible redeemable preference shares. A Series C Qualified
Public Offering referred to the closing of an underwritten public offering of the ordinary shares of the
Group in the United States that has been registered under the Securities Act of 1933 which represents
at least 25% of the fully-diluted share capital of the Group immediately following the offering, at a price
per share that values the Group at no less than $335,000,000 immediately prior to the offering.
The conversion price of Series A, Series B, Series C-1 and Series C-2 convertible redeemable
preference shares was subject to adjustment for dilution, including but not limited to share splits, share
dividends and recapitalization.
Additionally, the conversion price was to be adjusted for dilution in the following circumstances:
1) In the event that the Group issued additional ordinary shares at a price per share less than
the then prevailing Series A, Series B and Series C convertible redeemable preference shares’
respective conversion price, the Series A, Series B and Series C convertible redeemable
preference shares’ respective conversion price was to be reduced, concurrently with such
issuance, to a price (calculated to the nearest cent) equal to the price per share at which such
additional shares were to be issued.
2) If the Group’s financial results of 2004 and 2005 did not meet specified targets. Under the
terms of the amended and restated memorandum and articles of association in April 2005, the
performance-based adjustment was not triggered in 2004.
��
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006
(In U.S. dollars except share data and unless otherwise stated)
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13. CONverTIBLe reDeeMaBLe PreFereNCe SHareS (continued)
voting rights
Each Series A, Series B, Series C-1 and Series C-2 redeemable convertible preference share had voting
rights equivalent to the number of shares of ordinary shares into which it was convertible.
Dividends
The holders of Series A, Series B, Series C-1 and Series C-2 redeemable convertible preference shares
were to be entitled to receive out of any funds legally available therefore, when and if declared by
the Board of Directors of the Group, dividends at the rate or in the amount as the Board of Directors
considers appropriate.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the Group, as defined, the holders of Series
A, Series B, Series C-1 and Series C-2 convertible redeemable preference shares were to receive
$0.06 per share, $0.24 per share, $0.51 per share and $0.51 per share, respectively, plus all declared
but unpaid dividends. Such amounts were to be adjusted for any share splits, share dividends and
recapitalization.
In the event of any liquidation, dissolution or winding up of the Group caused by a “Trade Sale”, which is
defined as any sales of shares, merger, consolidation or other similar transaction involving the Group in
which its shareholders do not retain a majority of the voting power in the surviving entity, or a sale of all
or substantially all the Group’s assets, the holder of Series B redeemable convertible preference shares
were to receive the higher of (i) 200% of the original purchase price of the Series B preference shares,
for each Series B redeemable convertible preference share outstanding or (ii) the amount the holder
would have received if all of the Series B redeemable convertible preference shares held by such holder
were to be converted to ordinary shares immediately prior to such liquidation, dissolution or winding up
of the Group. According to the articles of association amended on November 29, 2004 (the “Modification
Date”), the net settlement feature of the Series B convertible redeemable preference shares under trade
sale was removed.
The embedded conversion option of Series B convertible redeemable preference shares has been
recorded at its fair value of $1,179,689 and accounted for separately as an embedded conversion
option. The Group has accounted for the derivative liability relating to the conversion option by adjusting
the liability to its estimated fair value at each subsequent balance sheet date up to the Modification Date,
with adjustments recorded as other income or expenses. In 2004, the Group adjusted the derivative
liability to fair market value and recorded a change in fair value of the derivative liability of $11,692,287
in the consolidated statements of operations. The Group recorded a deemed dividend of $1,179,689 in
2004, which resulted from the accretion of the discount of Series B convertible redeemable preference
shares. On the Modification Date, the Group has re-combined the fair value of the derivative liability of
$12,871,976 with Series B convertible redeemable preference shares and subsequently recorded an
accretion of premium of $12,906,774, which represented the difference of the carrying balance of Series
B convertible redeemable preference shares at the Modification Date and its initial issuance date.
��
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006 (In U.S. dollars except share data and unless otherwise stated)
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14. OrDINary SHareS
(1) In April 2003 the Group issued 2,000,000 ordinary shares for cash proceeds of $1,625,000.
(2) In May 2003, the Board of Directors approved a share split of 100:1 of the ordinary shares which
has been retroactively reflected in the Group’s financial statements.
(3) In April 2004, 62,400,000 outstanding ordinary shares were reclassified and redesignated into
62,400,000 Series A convertible redeemable preference shares.
(4) In September 2004, the Group issued 14,594,200 ordinary shares as partial consideration of the
acquisition of Perfect Media (Note 3).
(5) In December 2004, 9,729,600 outstanding ordinary shares were sold and redesignated in
9,729,600 Series C-1 convertible redeemable preference shares.
(6) On May 31, 2005, shareholders of the Group approved a 200-for-1 split of the Company’s shares,
with immediate effect. The 200-for-l share split of the Company’s shares has been retroactively
applied to all periods presented.
(7) Upon initial public offering on July 13, 2005, the Group issued 77,575,000 ordinary shares, for
US$1.7 per ordinary share, for total proceeds of US$118,174,130, net of offering expenses.
(8) On January 1, 2006, the Group issued 22,157,003 ordinary shares as partial consideration of the
acquisition of Infoachieve (Note 3).
(9) On January 27, 2006, the Group issued 15,000,000 ordinary shares, for US$4.35 per ordinary
share, for total proceeds of US$61,783,300, net of offering expenses.
(10) On February 28, 2006, the Group issued 77,000,000 ordinary shares as partial consideration of
the acquisition of all the outstanding ordinary shares of Target Media (Note 3).
(11) On March 1, 2006, the Group issued 74,720 ordinary shares related to an acquisition (Note 3).
(12) On May 30, 2006, the Group issued 22,470 ordinary shares related to an acquisition (Note 3).
(13) On June 16, 2006, the Group issued 16,000,000 ordinary shares, for US$5.4 per ordinary share,
for total proceeds of US$80,967,593, net of offering expenses.
(14) During the year ended December 31, 2006, the Group issued 26,336,680 ordinary shares
pursuant to share-based compensation plans upon exercise of options.
��
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006
(In U.S. dollars except share data and unless otherwise stated)
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15. MaINLaND CHINa CONTrIBUTION PLaN aND PrOFIT aPPrOPrIaTION
Full time employees of the Group in the PRC participate in a government-mandated multiemployer
defined contribution plan pursuant to which certain pension benefits, medical care, unemployment
insurance, employee housing fund and other welfare benefits are provided to employees. PRC
labor regulations require the Group to accrue for these benefits based on certain percentages of the
employees’ salaries. The total contribution for such employee benefits were $338,923, $619,831 and
$2,326,895 for the years ended December 31, 2004, 2005 and 2006, respectively.
Pursuant to laws applicable to entities incorporated in the PRC, the Group subsidiaries in the PRC
must make appropriations from after-tax profit to non-distributable reserve funds. These reserve funds
include one or more of the following: (i) a general reserve, (ii) an enterprise expansion fund and (iii) a staff
bonus and welfare fund. Subject to certain cumulative limits, the general reserve fund requires annual
appropriations of 10% of after tax profit (as determined under accounting principles generally accepted
in the PRC at each year-end) until such cumulative appropriation reaches 50% of the registered capital;
the other fund appropriations are at the company’s discretion. These reserve funds can only be used
for specific purposes of enterprise expansion and staff bonus and welfare and are not distributable
as cash dividends. For the years ended December 31, 2004, 2005 and 2006, the Group made total
appropriations of $1,488,000, $98,729, and $650,851 respectively.
16. COMMITMeNTS
Leases commitments
The Group has entered into certain leasing arrangements relating to the placement of the flat-panel
television screens in various locations where the Group operates the networks and in connection with
the lease of the Group’s office premises. Rental expense under operating leases for 2004, 2005 and
2006 were $3,648,829, $15,481,200 and $50,106,121, respectively.
Future minimum lease payments under non-cancelable operating lease agreements were as follows:
For the
year ended
December 31,
2007 $ 48,156,6472008 32,515,8652009 19,871,3792010 8,933,2762011 and thereafter 1,961,718
Total $ 111,438,885
��
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006 (In U.S. dollars except share data and unless otherwise stated)
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17. SeGMeNT INFOrMaTION
The Group is mainly engaged in operating an out-of-home advertising network in the PRC using flat-
panel television advertising displays located in high traffic commercial locations and in-store areas.
The Group also provides in-elevator poster frame advertising services and mobile handset advertising
services.
The Group’s chief operating decision maker has been identified as the Chief Executive Officer (“CEO”),
who reviews consolidated results when making decisions about allocating resources and assessing
performance of the Group. The Group uses the management approach to determine the operating
segments. The management approach considers the internal organization and reporting used by the
Group’s chief operating decision maker for making decisions, allocating resources and assessing
the performance. The Group has four operating segments and determined that it has three reporting
segments, which are out-of-home television advertising services (consists commercial location
advertising network and in-store advertising network), in-elevator poster frames, and mobile handset
advertising. The fourth operating segment did not meet the significance threshold for separate
disclosure and has been classified in “other”. These segments all derive their revenues from the sale of
advertising services.
The Group’s chief operating decision maker does not assign assets to these segments. Consequently,
it is not practical to show assets by reportable segments. Prior to 2006, the Group only had a single
operating segment, out-of-home television advertising services. The in-elevator poster frame advertising
services, mobile handset advertising services and others segments were the result of acquisitions made
in 2006.
The following table presents selected financial information relating to the Group’s segments for 2006:
Out-of-home
television
advertising
services
In-elevator
poster frame
advertising
services
Mobile handset
advertising
services Others elimination Total
Net revenues — external $ 160,210,414 $ 40,904,235 $ 10,100,965 $ 689,851 — $ 211,905,465Net revenues — intersegment — 245,274 — — (245,274) —
Total net revenues 160,210,414 41,149,509 10,100,965 689,851 (245,274) 211,905,465
Cost of revenues — external 60,948,103 13,622,059 6,051,846 758,359 — 81,380,367Cost of revenues — intersegment 245,274 — — — (245,274) —
Total cost of revenues 61,193,377 13,622,059 6,051,846 758,359 (245,274) 81,380,367
Gross profit (loss) 99,017,037 27,527,450 4,049,119 (68,508) — 130,525,098Interest income 4,419,572 123,740 17,194 292 — 4,560,798Interest expense 304,294 52 941 — — 305,287Depreciation and amortization 15,008,162 3,599,827 843,896 59,667 — 19,511,552Income taxes 1,060,314 103,434 (120,210) — — 1,043,538Net income (loss) $ 61,447,995 $ 20,006,067 $ 2,222,970 $ (479,300) — $ 83,197,732
��
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006
(In U.S. dollars except share data and unless otherwise stated)
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17. SeGMeNT INFOrMaTION (continued)
Geographic Information
The Group operates in the PRC and all of the Group’s long lived assets are located in the PRC.
Major Customers
As of December 31, 2004, 2005 and 2006, there were no customers who accounted for 10% or more
of the Group’s net revenues or accounts receivables.
Major Service lines
The Group derives revenues from the following major service lines:
For the year ended December 31,2004 2005 2006
% of % of % oftotal total total
revenues revenues revenues
Net revenues: Commercial location network $ 26,321,179 90.1% $ 61,434,760 90.0% $ 131,371,292 62.0% In-store network — — 5,468,919 8.0% 26,907,592 12.7% Poster frame network — — — — 40,904,235 19.3% Mobile Handset Advertising Network — — — 10,100,965 4.7% Movie theatres — — — — 689,851 0.3%
Advertising service revenue 26,321,179 90.1% 66,903,679 98.0% 209,973,935 99.0%Equipment revenue 2,888,720 9.9% 1,325,234 2.0% 945,606 0.5%Franchise revenue — — — — 985,924 0.5%
Total net revenues $ 29,209,899 100.0% $ 68,228,913 100.0% $ 211,905,465 100.0%
18. reLaTeD ParTy TraNSaCTIONS
Details of advertising service revenue from related parties for the years ended December 31, 2004,
2005 and 2006 are as follows:
year ended December 31,Name of related parties Director interested 2004 2005 2006
Shanghai Everease Advertising & Communication Ltd.
(“Everease”)
Jason Nanchun Jiang $ 1,302,331 $ 1,552,039 $ 7,764,977
Multimedia Park Venture Capital Jimmy Wei Yu 1,227,267 2,330,945 3,885,546Shanghai Jobwell Business Consulting Co., Ltd. Jimmy Wei Yu 411,034 1,050,258 1,382,695Shanghai Wealove Wedding Service Co., Ltd. Jimmy Wei Yu 372,488 757,850 1,122,945Shanghai Wealove Business Consulting Co., Ltd. Jimmy Wei Yu — — 671,488Shanghai Hetong Network Technology Co., Ltd. Jimmy Wei Yu 361,371 908,100 982,527Shanghai Shengchu Advertising Agency Co., Ltd. Jimmy Wei Yu — 1,646,120 3,230,040Beijing Sina Internet Information Services Co., Ltd. Charles Chao — — 190,563Beijing Sohu New-age Information Technology Co., Ltd. Daqing Qi — — 119,768Home-Inn Hotel Management (Beijing) Co., Ltd Neil Nanpeng Shen — — 78,742Ctrip Travel Information Technology (Shanghai) Co., Ltd. Neil Nanpeng Shen 48,287 264,120 178,933
Total $ 3,722,778 $ 8,509,432 $ 19,608,224
�0
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006 (In U.S. dollars except share data and unless otherwise stated)
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18. reLaTeD ParTy TraNSaCTIONS (continued)
Details of amounts due from related parties as of December 31, 2004, 2005 and 2006 are as follows:
December 31,Name of related parties Note Director interested 2004 2005 2006
Shanghai Everease Advertising &
Communication Ltd.
(a) Jason Nanchun Jiang $ 1,259,138 $ 572,525 $ 6,331,549
Multimedia Park Venture Capital (a) Jimmy Wei Yu 690,212 330,700 12,705Shanghai Jobwell Business Consulting Ltd. (a) Jimmy Wei Yu 275,971 546,207 —Shanghai Wealove Wedding Service Co., Ltd. (a) Jimmy Wei Yu 251,556 662,954 —Shanghai Hetong Network Technology Co., Ltd. (a) Jimmy Wei Yu 263,155 533,469 —Shanghai Shengchu Advertising Agency
Co., Ltd.
(a) Jimmy Wei Yu — 474,351 403,889
Home-Inn Hotel Management (Beijing) Co., Ltd (a) Neil Nanpeng Shen — — 39,699David Yu (b) David Yu — — 1,064,947
Total $ 2,740,032 $ 3,120,206 $ 7,852,789
Note (a) — These amounts represent trade receivables for advertising services provided.
Note (b) — The amount represents a payment due from the ex-shareholder of Target Media for an indemnification of a contingent
liability which arose after the acquisition. This amount was paid out in cash in 2007.
Details of amounts due to related parties as of December 31, 2004, 2005 and 2006 are as follows:
December 31,Name of related parties Note Director interested 2004 2005 2006
Tan Zhi (c) Tan Zhi $ — $ — $ $345,768
Note (c) — The amount represents the amount due to the president of Focus Media for operating funds of Framedia. The loan was
non-interest bearing and was repayable within one year.
Other related party transactions
For each of the years ended December 31, 2004, 2005 and 2006, office rentals were paid to Multimedia
Park Venture Capital amounting to $140,305, $395,083 and $476,902, respectively.
In 2006, Everease charged the Group $47,804 for providing administration services.
In March 2006, Weiqiang Jiang, father of Jason Nanchun Jiang, provided a short-term loan to the
Group of approximately $2.5 million to relieve a temporary shortage of Renminbi the Group experienced
at that time. The loan was unsecured and non-interesting bearing. At the end of June 2006, the Group
paid $2.5 million to Everease and they remitted this fund to Weiqiang Jiang on our behalf to repay the
loan outstanding.
�1
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006
(In U.S. dollars except share data and unless otherwise stated)
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19. reSTrICTeD NeT aSSeTS
Relevant PRC statutory laws and regulations permit payments of dividends by the Group’s PRC
subsidiaries only out of their retained earnings, if any, as determined in accordance with PRC accounting
standards and regulations. In addition, PRC laws and regulations require that annual appropriations of
10% of after-tax income should be set aside prior to payment of dividends as a general reserve fund.
As a result of these PRC laws and regulations, the Group’s PRC subsidiaries and PRC affiliates are
restricted in their ability to transfer a portion of their net assets to Focus Media Holding in the form of
dividends, loans or advances, which restricted portion amounted to approximately $223,386,461 as of
December 31, 2006.
20. SUBSeQUeNT eveNT
In January and February 2007, the Group acquired five companies which provide in-elevator poster
frame advertising services. The purchase consideration for each of these five entities is contingent
upon the achievement of certain earning targets over the next one to three fiscal years. The Group
made an advance payment of $6.2 million, which will be deducted from the contingent purchase price
consideration.
In March 2007, the Group acquired five companies which provide mobile handset advertising services.
The purchase consideration for each of these five entities is contingent upon the achievement of certain
earnings target over the next 12 months to 25 months. The Group made an advance payment of $8.7
million, which will be deducted from the contingent purchase price consideration.
In March 2007, the Group acquired a billboard advertising company. The purchase consideration is
contingent upon the operating results over the next three years. The Group made an advance payment
of $3 million, which will be deducted from the contingent purchase price consideration.
In March 2007, the Group completed the acquisition of Allyes Information Technology Company Limited,
or Allyes, a Cayman Islands company, which operates an Internet advertising marketing agency and
technology services company through its PRC affiliated entities. Allyes is the largest Internet advertising
agency and provider of Internet advertising technology in China. The purchase price consideration was
$70 million in cash and 19,969,080 ordinary shares having a fair value of $154,281,112, or $7.726 per
ordinary share. Framedia achieved certain earnings targets for the year ended December 31, 2006 and,
as a result, on June 15, 2007 the Group issued 35,830,622 ordinary shares as additional purchase
consideration. The fair value of the ordinary shares was based on the average market price of Focus
Media Holding’s common shares over the three days before, the day of and three days after the terms
of the acquisition were agreed to and announced. Additional consideration of 9,662,458 ordinary shares
is issuable, contingent upon Allyes meeting certain earnings targets during the twelve month period
from April 1, 2007 to March 31, 2008.
��
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006 (In U.S. dollars except share data and unless otherwise stated)
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20. SUBSeQUeNT eveNT (continued)
The aggregate purchase price, excluding contingent consideration, of $224,698,474 consisted of the
following:
Cash consideration $ 70,000,000Other acquisition costs 417,362Value of the ordinary shares issued 154,281,112
Total consideration $ 224,698,474
The purchase price has been preliminarily allocated as follows:
amortization
period
Net tangible assets acquired $ 25,415,921Intangible assets: Acquired technology 11,832,000 6 years Customer relationship 10,249,000 7 years Other 2,373,729 1–7 yearsGoodwill 171,664,220 N/A
Total $ 224,698,474
In the second quarter of 2007, the Group completed acquisitions of eight companies which primarily
provide mobile handset advertising, Internet advertising and outdoor billboard advertising services, for
an aggregate purchase considerations of approximately US$7.5 million plus additional consideration
contingent upon the achievement of certain earnings targets over the next one to three fiscal years. The
Group also made an advance payment of US$16.3 million, which will be deducted from the contingent
purchase price consideration.
In June 2007, the Group issued 35,830,619 ordinary shares as additional purchase consideration to ex-
shareholders of Framedia because it achieved certain earnings targets for the year ended December 31,
2006.
In June 2007, the Group issued 1,500,000 ordinary shares as additional purchase consideration to ex-
shareholders of Dotad because it has met its earning targets in the first year it was acquired.
��
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006
(In U.S. dollars except share data and unless otherwise stated)
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aPPeNDIx 1
Subsidiaries of Focus Media Holding Limited
The following table sets forth information concerning our direct subsidiaries:
Subsidiary
Place of
Incorporation
Percentage of
ownership
Focus Media (China) Holding Ltd. Hong Kong 100%Focus Media Technology (Shanghai) Co., Ltd. PRC 100%
British Virgin IslandsPerfect Media Holding Ltd. (“BVI”) 100%Focus Media Qingdao Holding Ltd. BVI 100%Focus Media Dalian Holding Ltd. BVI 100%Focus Media Changsha Holding Ltd. BVI 100%Focus Media Digital Information Technology (Shanghai) Co., Ltd. PRC 100%New Focus Media Technology (Shanghai) Co., Ltd. PRC 100%Sorfari Holdings Limited BVI 100%Focus Media Tianjin Limited BVI 80%Capital Beyond Limited BVI 100%Shanghai New Focus Media Advertisement Co., Ltd. PRC 90%Shanghai New Focus Media Agency Co., Ltd. PRC 90%Shanghai Focus Media Defeng Advertisement Co., Ltd. PRC 90%Shanghai Focus Media Baiwang Advertising Co., Ltd. PRC 70%Shanghai Focus Media Xiangkun Advertising Co., Ltd. PRC 70%Infoachieve Limited BVI 100%Shanghai Framedia Investment Consultation Co., Ltd. PRC 100%Target Media Holdings Limited Cayman Islands 100%Target Media Multi-Media Technology (Shanghai) Co., Ltd. PRC 100%Dotad Holdings Limited BVI 100%ProfitBest Worldwide Limited BVI 100%Wiseglobal Investments Limited BVI 100%Summitworld Limited BVI 100%Newking Investment Limited BVI 100%Surge Zhenghe Holding Limited BVI 100%Speedaccess Limited BVI 100%Peakbright Group Limited BVI 100%Homesky Investment Limited BVI 100%Bestwin Partners Limited BVI 100%Glomedia Holdings Limited BVI 100%Appreciate Capital Ltd. BVI 70%Richcrest Pacific Limited BVI 100%Wealthstar Holdings Limited BVI 100%Highmark Asia Limited BVI 100%Plentiworth Investment Limited BVI 100%Directwealth Holdings Limited BVI 100%Better off Investments Limited BVI 100%Topstart Holdings Limited BVI 100%Vast Well Development Limited BVI 100%Crownsky Limited BVI 100%
�4
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006 (In U.S. dollars except share data and unless otherwise stated)
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aPPeNDIx 1 (continued)
Subsidiaries of Focus Media advertisement
The following table sets forth information concerning Focus Media Advertisement’s subsidiaries each of which
is incorporated in China:
Focus Media
advertisement’s
Ownership
Percentage
region of
Operations Primary Business
Shanghai Focus Media Advertising
Co., Ltd.
90.0%(1) Shanghai Advertising agency
Shanghai Perfect Media Advertising
Agency Co., Ltd.
90.0%(1) Shanghai Advertising company that operates
advertising services network on
shoe-shining machines
Qingdao Fukesi Advertisement
Co., Ltd.
90.0%(1) Qingdao Operation and maintenance of
out-of-home television advertising
network (former regional distributor)
Changsha Focus Media Shiji
Advertisement Co., Ltd.
90.0%(1) Changsha Operation and maintenance of
out-of-home television advertising
network (former regional distributor)
Dalian Focus Media Advertising
Co., Ltd.
90.0%(1) Dalian Operation and maintenance of
out-of-home television advertising
network (former regional distributor)
Shanghai Qianjian Advertising
Co., Ltd.
90.0%(1) Shanghai Operation and maintenance of
out-of-home television advertising
network in banking locations
Guangzhou Framedia Advertising
Company Ltd.
90.0%(1) Guangzhou Operation and maintenance of
out-of-home television advertising
network
Zhuhai Focus Media Culture and
Communication Company Ltd.
90.0%(1) Zhuhai Operation and maintenance of
out-of-home television advertising
network (former regional distributor)
Shanghai Focus Media Digital
Information Technology Co., Ltd.
10%(3) Shanghai Technical and business consultancy
Shenzhen Bianjie Building
Advertisement Co., Ltd.
90.0%(2) Shenzhen Operation and maintenance of
frame advertising network
Hebei Tianma Weiye Advertising
Company Ltd.
90.0%(2) Hebei Operation and maintenance of
out-of-home television advertising
network (former regional distributor)
��
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006
(In U.S. dollars except share data and unless otherwise stated)
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aPPeNDIx 1 (continued)
Subsidiaries of Focus Media advertisement (continued)
Focus Media
advertisement’s
Ownership
Percentage
region of
Operations Primary Business
Xiamen Focus Media Advertising
Company Ltd.
90.0%(2) Xiamen Operation and maintenance of
out-of-home television advertising
network (former regional distributor)
Sichuan Focus Media Advertising
Communications Co., Ltd.
90.0%(3) Chengdu Operation and maintenance of
out-of-home television advertising
network
Shanghai New Structure
Advertisement Co., Ltd.
90.0%(2) Shanghai Technical and business consultancy
for poster frame network
Shanghai Framedia Advertising
Development Co., Ltd.
90.0%(2) Shanghai Operation and maintenance of
advertising poster frame network
Guangzhou Shiji Shenghuo
Advertisement Co., Ltd.
90.0%(2) Guangzhou Operation and maintenance of
advertising poster frame network
Hefei Fukesi Advertising Co. Ltd. 90.0%(2) Hefei Operation and maintenance of
out-of-home television advertising
network (former regional distributor)
Jinan Focus Media Advertising
Co., Ltd.
90.0%(2) Jinan Operation and maintenance of
out-of-home television advertising
network (former regional distributor)
Shenzhen E-Times Consulting
Co., Ltd.
90.0%(2) Shenzhen Operation and maintenance of
advertising poster frame network
Shanghai Target Media Co., Ltd. 90.0%(2) Shanghai Dormant (Former operation and
maintenance of Target Media’s
out-of-home television advertising
network)
Shenyang Target Media Ltd. 90.0%(2) Shenyang Dormant (Former operation and
maintenance of Target Media’s
out-of-home television advertising
network)
Fuzhou Hengding United Media Ltd. 90.0%(2) Fuzhou Dormant (Former operation and
maintenance of Target Media’s
out-of-home television advertising
network)
��
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006 (In U.S. dollars except share data and unless otherwise stated)
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aPPeNDIx 1 (continued)
Subsidiaries of Focus Media advertisement (continued)
Focus Media
advertisement’s
Ownership
Percentage
region of
Operations Primary Business
Beijing Focus Media Wireless Co.,
Ltd.
90.0%(2) Beijing Operation of mobile handset
advertising service network
Guangzhou Feisha Advertisement
Co., Ltd.
90.0%(2) Guangzhou Operation and maintenance of
out-of-home television advertising
network (former regional distributor)
DongGuan Focus Media
Advertisement & Communications
Co., Ltd.
90.0%(2) Dongguan Operation and maintenance of
out-of-home television advertising
network (former regional distributor)
Shanghai FengJing Advertisement &
Communications Co., Ltd.
95.0%(2) Shanghai Operation and maintenance of
out-of-home television advertising
network (former regional distributor)
Zhengzhou Focus Media
Advertisement & Communications
Co., Ltd.
85.0%(2) Zhengzhou Operation and maintenance of
out-of-home television advertising
network (former regional distributor)
Shijiazhuang Focus Media HuiHuang
Business Advertisement Co., Ltd.
90.0%(2) Shijiazhuang Operation and maintenance of
advertising poster frame network
Nanjing Focus Media Advertising
Co., Ltd.
90.0%(3) Nanjing Operation and maintenance of
out-of-home television advertising
network (former regional distributor)
Yunnan Focus Media Co., Ltd. 89.5%(2) Kunming Operation and maintenance of
out-of-home television advertising
network (former regional distributor)
Tianjin Focus Tongsheng Advertising
Company Ltd.
80.0%(2) Tianjin Operation and maintenance of
out-of-home television advertising
network (former regional distributor)
Zhejiang Ruihong Focus Media
Advertising Communications
Co., Ltd.
80.0%(2) Hangzhou Operation and maintenance of
out-of-home television advertising
network (former regional distributor)
��
Notes to the Consolidated Financial StatementsFor the years ended December 31, 2004, 2005 and 2006
(In U.S. dollars except share data and unless otherwise stated)
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aPPeNDIx 1 (continued)
Subsidiaries of Focus Media advertisement (continued)
Focus Media
advertisement’s
Ownership
Percentage
region of
Operations Primary Business
Wuhan Geshi Focus Media
Advertising Co., Ltd.
75.0%(2) Wuhan Operation and maintenance of
out-of-home television advertising
network (former regional distributor)
Xian Focus Media Advertising &
Information Company Ltd.
70.0%(3) Xian Operation and maintenance of
out-of-home television advertising
network (former regional distributor)
Shenyang Focus Media Advertising
Co., Ltd.
70.0%(3) Shenyang Operation and maintenance of
out-of-home television advertising
network (former regional distributor)
Fuzhou Focus Media Advertising
Co., Ltd.
70.0%(3) Fuzhou Operation and maintenance of
out-of-home television advertising
network (former regional distributor)
Chongqing Geyang Focus Media
Culture & Broadcasting Co., Ltd.
60.0%(2) Chongqing Operation and maintenance of
out-of-home television advertising
network (former regional distributor)
Shanghai On-Target Advertisement
Co., Ltd.
60.0%(3) Shanghai Advertising agency
Shanghai Jiefang Focus Media
Advertisement & Communications
Co., Ltd.
70.0%(3) Shanghai Operation and maintenance of
out-of-home television advertising
network (former regional distributor)
City Billboard (BeiJing)
Advertisement Co., Ltd.
75.0%(3) BeiJing Advertising agency
BeiJing YangShiSanWei
Advertisement Co., Ltd.
70.0%(3) BeiJing Advertising agency
(1) The remaining equity interest is held by Jimmy Wei Yu as our nominee holder.
(2) The remaining equity interest is held by Focus Media Advertising Agency.
(3) The remaining equity interest in this entity is owned by unrelated third parties.
(4) The remaining equity interest in this entity is owned by Focus Media Digital.
��
Additional Information — Financial Statement Schedule 1
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These financial statements have been prepared in conformity with accounting principles generally accepted in
the United States
FINaNCIaL INFOrMaTION OF PareNT COMPaNy
Balance Sheets
December 31,2004 2005 2006(In U.S. Dollars, except share data)
assets Cash and cash equivalents $ — $ — $ 37,483,101 Prepaid expenses and other current assets — 121,482 151,257 Amounts due from related parties 25,072,466 94,813,430 94,949,887 Acquired intangible assets, net — — 6,323,076 Investments in subsidiaries and affiliates 23,806,034 96,877,616 925,981,259
Total assets $ 48,878,500 $ 191,812,528 $ 1,064,888,580
Liabilities, mezzanine equity and shareholders’ equity (deficiency)Current liabilities: Accrued expenses and other current liabilities 1,178,545 397,877 14,144,589
Total current liabilities 1,178,545 397,877 14,144,589
Mezzanine equitySeries A convertible redeemable preference shares ($0.00005 par value; 41,967,400 shares authorized and 41,967,400, nil and nil shares issued and outstanding in 2004, 2005 and 2006, respectively) 6,295,110 — —Series B convertible redeemable preference shares ($0.00005 par value; 48,191,600 shares authorized and 48,191,600, nil and nil shares issued and outstanding in 2004, 2005 and 2006, respectively) 12,062,696 — —Series C-1 convertible redeemable preference shares ($0.00005 par value; 34,054,000 shares authorized and 34,054,000, nil and nil shares issued and outstanding in 2004, 2005 and 2006, respectively) 17,500,350 — —Series C-2 convertible redeemable preference shares ($0.00005 par value; 34,053,400 shares authorized and 34,053,400, nil and nil shares issued and outstanding in 2004, 2005 and 2006, respectively) 17,415,000 — —
Shareholders’ equity (deficiency)Ordinary shares ($0.00005 par value; 885,516,600, 19,800,000,000 and 19,800,000,000 shares authorized in 2004, 2005 and 2006; 142,464,600, 378,306,000 and 534,896,873 shares issued and outstanding in 2004, 2005 and 2006, respectively) 7,124 18,916 26,745Additional paid-in capital 5,981,154 177,419,761 709,196,246Acquisition consideration to be issued — — 237,879,480Deferred share-based compensation (969,959) (246,569) —Retained earnings (accumulated deficit) (10,550,414) 12,997,237 96,194,969Accumulated other comprehensive income (loss) (41,106) 1,225,306 7,446,551
Total shareholders’ equity (deficiency) $ (5,573,201) $ 191,414,651 $ 1,050,743,991
Total liabilities, mezzanine equity and shareholders’ equity (deficiency) $ 48,878,500 $ 191,812,528 $ 1,064,888,580
��
Additional Information — Financial Statement Schedule 1
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Statements of Operations
For the years ended December 31,2004 2005 2006
(In U.S. dollars)
Net revenues: $ — $ — $ 719,978
Cost of revenues: — — 146,943
Gross profit — — 573,035
Operating expenses:General and administrative 461,183 1,300,511 7,894,125Selling and marketing 27,528 43,317 2,090,387Amortization of acquired intangible assets — — 79,377
Total operating expenses 488,711 1,343,828 10,063,889
Loss from operations (488,711) (1,343,828) (9,490,854)Interest income — — 791,669Other expense — (7,339) (44,755)Equity in earnings of subsidiaries and equity affiliates 12,553,750 24,898,818 91,941,672Change in fair value of derivative liability associated with
Series B convertible redeemable preference shares (11,692,287) — —
Income (loss) before income taxes 372,752 23,547,651 83,197,732Income tax expenses — — —
Net income (loss) 372,752 23,547,651 83,197,732Deemed dividend on Series A convertible redeemable
preference shares (8,308,411) — —Deemed dividend on Series B convertible redeemable
preference shares (2,191,442) — —Deemed dividend on Series C-1 convertible redeemable
preference shares (13,356,087) — —Premium of Series B convertible redeemable preference shares 12,906,774 — —
Income (loss) attributable to holders of ordinary shares $ (10,576,414) $ 23,547,651 $ 83,197,732
100
Additional Information — Financial Statement Schedule 1
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Statements of Cashflows
For the year ended December 31,2004 2005 2006
(In U.S. dollars)
Operating activities:Income (loss) attributable to holders of ordinary shares $ (10,576,414) $ 23,547,651 $ 83,197,732Deemed dividend on Series A convertible redeemable preference shares 8,308,411 — —Deemed dividend on Series B convertible redeemable preference shares 2,191,442 — —Deemed dividend on Series C-1 convertible redeemable preference
shares 13,356,087 — —Premium relating to Series B convertible redeemable preference shares (12,906,774) — —
Net income (loss) 372,752 23,547,651 83,197,732Adjustments to reconcile net income to net cash provided by (used in)
operating activities: Share-based compensation 488,711 726,503 8,367,406 Amortization of intangibles — — 80,039 Change in fair value of derivative liability associated with Series B
convertible redeemable preference shares 11,692,287 — — Equity in earning of subsidiaries (12,553,750) (24,898,818) (91,941,672) Changes in assets and liabilities: Prepaid expenses and other current assets — (121,482) (29,775) Amounts due from related parties (23,915,404) (69,740,965) (136,456) Accrued expenses and other current liabilities 1,178,545 (780,665) 9,239,041
Net cash used in operating activities $ (22,736,859) $ (71,267,776) $ 8,776,315
Investing activities:Investments in subsidiaries and affiliates (6,741,485) (8,208,870) (124,508,517)Deposit paid to acquire subsidiaries — (40,919,530) (696,228)Purchase of intangibles — — (3,225,161)
Net cash used in investing activities $ (6,741,485) $ (49,128,400) $ (128,429,906)
Financing activities:Proceeds from issuance of ordinary shares — 118,174,130 142,750,893Proceeds from issuance of ordinary shares pursuant to stock option
plans — — 15,247,561Proceeds from issuance of Series B convertible redeemable preference
shares (net of issuance costs of $437,304) 12,062,696 — —Proceeds from issuance of Series C-2 convertible redeemable preference
shares (net of issuance costs of $85,000) 17,415,000 — —
Net cash provided by financing activities $ 29,477,696 $ 118,174,130 $ 157,998,454
Effect of exchange rate changes 648 2,222,046 (861,762)
Net increase in cash and cash equivalents — — 37,483,101Cash and cash equivalents, beginning of year — — —
Cash and cash equivalents, end of year $ — $ — $ 37,483,101
Corporate InformationManagementJason Nanchun JiangChief Executive Officer
Zhi TanPresident
Daniel Mingdong WuChief Financial Officer
Diana Congrong ChenChief Operating Officer
Cindy Yan ChanChief Strategy Officer
July Lilin WangFinancial Controller
Ergo Xueyuan LiuVice President — Commercial Location Network
Acer Jiawei ZhangVice President — In-store Network
Maodong XuCEO, Focus Media wireless (wholly-owned subsidiary)
Hailong ZhuCEO, Allyes (wholly-owned subsidiary)
Board of DirectorsJason Nanchun JiangFounder, Chairman of the Board of Directors, Focus Media
David Feng YuCo-Chairman of the Board of Directors, Focus Media
Zhi TanPresident, Focus Media
Jimmy YuChairman and Chief Executive Officer,
United Capital Investment (China) Limited
Fumin Zhuo*(1)
General Partner, SIG Capital Limited
Neil Nanpeng Shen*(1)
Founding Managing Partner, Sequoia Capital China
Charles Chao*(1)
Chief Executive Officer, SINA Corporation
Daqing Qi*Professor of Accounting and Associate Dean, The Cheong Kong Graduate School of Business
David Zhang*Managing director and head of the Beijing office of WI Harper
* Independent Director(1) a member of our audit committee, compensation committee and
nomination committee
Depositary for american Depositary SharesCitibank, N.A 388 Greenwich Street 14th Floor New York, NY 10013 USA
Transfer agentDexia Corporate Services Hong Kong Ltd. 51/F Central Plaza 18 Harbour Road Wanchai Hong Kong
U. S. Legal CounselSimpson Thacher & Bartlett LLP ICBC Tower, 7th, Floor 3 Garden Road HongKong
Independent accountantDeloitte & Touche 30/F Bund Center 222 Yan An Road East Shanghai, 200002 PRC
Corporate Headquarters28-30/F, Zhaofeng World Trade Tower 369 Jiangsu Road, 200050 Shanghai People’s Republic of China (86) 21 3212-4661
Investor relations+86-21-3212 4661 ext. 6607 Ir.focusmedia.cn
annual MeetingFocus Media will host its 2007 annual general shareholder meeting at 10:00am on December 27, 2007 Beijing time at its corporate headquarters at the following address: 28-30/F, Zhaofeng World Trade Tower 369 Jiangsu Road, 200050 Shanghai People’s Republic of China
Stock Market InformationFocus Media shares are traded in the form of American Depositary Receipts (ADRs), on the Nasdaq Global Market under the symbol “FMCN”, with one ADR corresponding to ten ordinary shares
In US$ 2006aDr price rangeHighLowOn September 29, 2007Number of Shares (as of June 30, 2007, in million)Number of ADSs outstanding (as of June 30, 2007, in million)Market capitalization (on June 30, 2007, in million US$)Per-aDS dataEarnings per ADR (Basic)Earnings per ADR (Fully diluted)
72.1935.02
58.02 *578.5115.75,842
1.61.6
July 13, 2005 September 29, 2007
Indexed
▲ Splits:11-Apr-07 [2:1]
Nasdaq Composite (ˆIXIC)
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Focus Media Holding Limited
